BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
EXXONMOBIL CORPORATION FROM A ) Docket No. 2004-84
CHANGE OF METHODOLOGY DECISION )
BY THE MINERAL DIVISION OF THE )
DEPARTMENT OF REVENUE )
IN THE MATTER OF THE APPEAL OF )
EXXONMOBIL CORPORATION FROM A )
NOTICE OF VALUATION FOR TAXATION ) Docket No. 2004-85
PURPOSES FROM THE MINERAL )
TAX DIVISION OF THE )
DEPARTMENT OF REVENUE )
IN THE MATTER OF THE APPEAL OF )
EXXONMOBIL CORPORATION FROM ) Docket No. 2004-120
A DECISION BY MINERAL DIVISION )
OF THE DEPARTMENT OF REVENUE )
IN THE MATTER OF THE APPEAL OF )
EXXONMOBIL CORPORATION FROM )
A NOTICE OF VALUATION CHANGE ) Docket No. 2004-140
BY THE MINERAL TAX DIVISION OF )
THE DEPARTMENT OF REVENUE )
(NOVC 2004-0752) )
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER
APPEARANCES
Mr.
Lawrence J. Wolfe, Mr. Patrick R. Day, and Mr. Walter F. Eggers, III of Holland &
Hart, LLP; Mr. Brent R. Kunz of Hathaway & Kunz, P. C.; Mr. Michael Murray and Mr. Roy
Partain of Exxon Mobil Corporation, for Exxon Mobil Corporation (ExxonMobil).
Mr.
Martin L. Hardsocg and Mr. William R. Russell of the Wyoming Attorney General’s Office
for the Wyoming Department of Revenue (Department).
JURISDICTION
The
Wyoming State Board of Equalization (Board) shall review final decisions of the Department
on application of any interested person adversely affected, including boards of county
commissioners. Wyo. Stat. Ann. § 39-11-102.1(c). Taxpayers are specifically
authorized to appeal final decisions of the Department. Wyo. Stat. Ann. § 39-14-209(b).
The taxpayer’s appeal must be filed with the Board within thirty days of the Department’s
final decision. Wyo. Stat. Ann. § 39-14-209(b); Rules, Wyoming State Board of
Equalization, Chapter 2, § 5(a). By Notices of Appeal dated June 18, 2004, August 20,
2004, and November 12, 2004, ExxonMobil timely appealed four final decisions of the
Department. The Board accordingly has jurisdiction to hear these matters.
The
Board divided the issues into two Tiers. [Prehearing Conference Report, June 17,
2005]. The Board held hearings on Tier 1 issues on June 27 through 30, 2005, and on Tier 2
issues on September 12 through 15, 2005, before Alan B. Minier, Chairman, Thomas R.
Satterfield, Vice-Chairman, and Thomas D. Roberts, Board Member.
STATEMENT OF THE CASE
On May
21, 2004, the Department sent ExxonMobil a letter notice terminating a settlement
agreement the Department had been using to value natural gas production from ExxonMobil’s
LaBarge gas fields since 1989. The Department letter directed ExxonMobil to redetermine
the taxable value of its 2003 natural gas production using a statutory proportionate
profits method. The Board concludes that Wyo. Stat. Ann. § 39-14-203(b)(vi) obliges the
Department to notify ExxonMobil of the Department’s intention to use the statutory
method no later than September 1st of the year preceding the year that the
statutory method is to be used. The Department’s direction was therefore contrary to
law.
In its
decision, the Board also addresses the application of this decision to production year
2004, and addresses an issue related to reporting and payment of taxes of working interest
owners.
CONTENTIONS AND ISSUES
The
Board’s Prehearing Conference Report of June 22, 2005, summarized the contentions of the
parties, and identified issues of fact and law to be heard during two separate weeks of
hearings. The principal issue of law was:
Does the Department’s attempt to retroactively change ExxonMobil’s valuation method for production year 2003 violate Wyoming Law (Second Tier, Issue 8.J.)?
Yes.
In
answering this question of law, we rely on Findings of Fact which answer the related
question of fact (Second Tier, Issue 7.D.):
When, how and why did the Department decide to retroactively abandon use of the tax settlement agreement methodology to value ExxonMobil’s 2003 production for tax purposes?
The
Board has determined that only one other mixed question of fact and law remains to be
decided. The remaining issue of law was (First Tier, Contention 3, Issue 6.C.):
Is the Department’s plan to retroactively require ExxonMobil to report and pay taxes for all working interest owners contrary to Wyoming law?
Yes, subject to two clarifications: (1) Due to our ruling on the principal issue, which leaves in place the reporting arrangements of a 1989 settlement agreement, the only matter before us is the Department’s power to require this taxpayer to pay taxes for its working interest owners. (2) Our ruling rests on the Department’s Rules.
FINDINGS OF FACT
1. ExxonMobil
produces natural gas from its three unitized LaBarge gas fields in Sublette County,
Wyoming. [Joint Stipulation of
Facts, ¶ 1]. The vast gas reservoir – sufficient for hundreds of years of
production at current rates – is principally composed of carbon dioxide, together with
valuable amounts of methane and helium, and with lethal amounts of hydrogen sulfide. [Joint Stipulation of Facts, ¶¶ 3,
4]. ExxonMobil dehydrates the field gas at its Black Canyon dehydration plant, then
transports the gas by pipeline forty miles to its Shute Creek processing plant. [Joint Stipulation of Facts, ¶¶ 8 -
11]. At the large and complex Shute Creek processing plant, ExxonMobil separates
out the components of the gas for sale or other disposition. [Joint Stipulation of Facts, ¶¶ 12
- 17, 27; Exhibit 100].
2. The
Board has previously recounted the history of disputes involving determination of the
taxable value of LaBarge natural gas. Sublette
County Board of County Commissioners, Docket Nos. 2000-142, et. al., May 20, 2004,
2004 WL 1174651 (Wyo. St. Bd. Eq.)(hereafter, ExxonMobil 2004). Those disputes were
temporarily resolved on May 20, 2004, when the Board upheld the Department’s continuing
use of a 1989 Tax Settlement Agreement to determine the value of LaBarge production. Id.
The parties to the 1989 Tax Settlement Agreement included (among others) ExxonMobil’s
predecessor Exxon Corporation, the State of Wyoming, and Sublette County, Wyoming.
[Exhibit 804]. All three were represented in the ExxonMobil 2004 proceedings. ExxonMobil
2004, at 1.
3. The
Board’s decision in ExxonMobil 2004 followed a lengthy history of prior appeals. See
ExxonMobil 2004, ¶¶ 156, 177, 214, 225, 229-230, 256-257, 262-265, 300. This
prior litigation generally provided a context for the Board’s decision. For example, one
of the prior appeals established that the 1989 Settlement Agreement was a judicial decree.
Exxon Corporation v. Board of County Commissioners, Sublette County, 987 P.2d 158,
165 (Wyo. 1999).
4. ExxonMobil
expressed relief with the results of ExxonMobil 2004. [Tier 2 Transcript, Vol. 1,
p. 57]. That relief lasted only a day. On May 21, 2004, the Department sent ExxonMobil a
letter stating, inter alia, the Department was terminating the 1989 Settlement Agreement.
[Tier 2 Transcript, Vol. 1, p. 57; Exhibit 807 (hereafter, the May 21st
letter)]. The letter is the principal decision from which ExxonMobil appeals.
5. The
May 21st letter introduced most of the factual issues now before the Board.
However, the letter includes many references familiar only to the parties in this case.
The Board will examine the Department’s letter paragraph by paragraph, followed by
findings necessary or helpful to provide a context for what the Department said.
6. The
Director of the Department and the Administrator of the Department’s Mineral Tax
Division jointly sent the May 21st letter, which began with an overall
expression of intention:
This is to advise ExxonMobil Corporation that the State of Wyoming no longer will recognize the Settlement Agreement dated January 12, 1989 as a methodology to value all natural gas and associated natural resources produced from the LaBarge wellfield in Sublette County, Wyoming and processed in ExxonMobil’s Shute Creek plant. In 1989, ExxonMobil, the State of Wyoming and Sublette County were embroiled in a valuation controversy and, as a means to settle that dispute, the parties mutually agreed to “recognize the Howell and Yates Agreement as a comparison value in conjunction with other recognized appraisal techniques” with the proviso that after August 31, 1991, the State could utilize another methodology.
[Exhibit 807, p. XOM 13928]. The letter introduces, but does
not explain, Howell and Yates; the written sources on which the settlement agreement
relied; the settlement methodology; and the parties’ power to terminate the agreement.
7. In 1989, Howell and Yates were working
interest owners in the Fogarty Creek unit, one of three that were and are the source of
LaBarge natural gas. ExxonMobil was the operator of all three units, and held all federal
leases in two of the units. [Joint Stipulation of Facts, ¶ 21].
8. Exxon
bore the costs of drilling in all three units. Howell and Yates elected to share in the
cost of drilling the Fogarty Creek unit. No other interest owners participated in the cost
of drilling the wells, and by contract would not enjoy any proceeds from the wells until
the investors had received their investment back, plus a penalty. The proportion at which
ExxonMobil, Howell, and Yates carried the other interest owners varied from well to well.
[Joint Stipulation of Facts, ¶ 21].
9. The
construction of the gas processing plant required further investment, all of which was
borne by Exxon. By 1985, plant costs had doubled over original projections, and methane
prices were falling. In this financial climate, Exxon’s project team offered Howell and
Yates a chance to acquire an ownership interest in the plant. Howell and Yates declined. [Joint
Stipulation of Facts, ¶ 23].
10. Howell
and Yates also balked at the alternative of a straight processing fee agreement with
Exxon, because a fee based on Exxon’s processing costs was too high, once depreciation
and a return on investment were factored in. This impasse eventually prompted Howell and
Yates to file an antitrust suit against Exxon, seeking damages of $380 million. [Joint
Stipulation of Facts, ¶ 24].
11. Howell
and Yates both settled the suit against Exxon. [Exhibits 800, 801]. As part of the
settlement, Howell and Yates separately entered into Processing Agreements effective
August 1, 1988. [Exhibits 802, 803]. Under these Processing Agreements, Exxon agreed to
process Howell and Yates gas for a fee initially equal to 65% of production. [Exhibits
802, 803, paragraph 6.2 of each Exhibit].
12. ExxonMobil
markets all production from the plant. [Tier 2 Transcript, Vol. II, p. 318]. ExxonMobil
wrote Howell and Yates checks each month reflecting the revenue from sale of their
respective shares of product gas, net of the processing fee. [Exhibits 802, 803]. These
payments included a payment for proceeds from the sale of helium. [Exhibits 802, 803].
13. After
the first three years the Howell and Yates Agreements were in effect, and thereafter until
2021, the processing fee rose to 75% of production. [Joint Stipulation of Facts, ¶
28]. Through its reliance on the Howell and Yates Agreements, the 1989 Tax Settlement
Agreement incorporated this rise in processing fee. The processing deduction for tax
purposes rose to 75% after August 31, 1991. [Exhibit 804, p. 9].
14. By its
reliance on the Howell and Yates Agreements, the 1989 Tax Settlement Agreement
incorporated a valuation methodology which did not conform to any of the statutory
valuation methods enacted in 1990. See Conclusions, ¶ 97; see generally
ExxonMobil 2004, ¶¶ 88-111.
15. The 1989
Tax Settlement Agreement did not have a specific term. The only portion of the agreement that speaks to
termination is Section 2.e.,
which is entitled, “Valuation of Future Production for all Purposes.” The two
paragraphs of the Section, broken up into individual sentences for easier digestion,
provide:
The State and the County agree to value, for all tax purposes, all production from the Wellfield occurring during the period of January 1, 1989 through August 31, 1991 using the comparison value method provided in Section 10 of the current Regulations of the Board of Equalization by using the agreements negotiated between Exxon and Howell Petroleum Corp. and Yates Petroleum Corp. as the comparable value.
The Howell and Yates agreements set a taxable value for the Wellfield natural gas and associated natural resources as determined in Section 2.f. During this period [of January 1, 1989 through August 31, 1991], Exxon agrees not to contest the applicability of ad valorem and severance tax to Federal helium.
If the Wyoming legislature passes legislation that requires Exxon to use valuation methods other than the comparison value method described above, or if the Legislature in the future imposes a specific tax on helium, the Parties agree that the questions of future taxability, for both severance and ad valorem purposes on production on and after January 1, 1989, and value of future helium production remain open and the parties are not prejudiced nor are the issues resolved in any manner by this Agreement.
After August 31, 1991, the State agrees that it will recognize the Howell and Yates agreements as a comparison value and that the comparison value method may be used in conjunction with other recognized appraisal techniques to determine value.
If the State uses any method other than the comparison value based on the Howell and Yates agreements, the Parties agree that the question of the future taxability, for severance and ad valorem purposes, and value of future helium production remain open and are not resolved by this Agreement.
The State and the County agree that Exxon’s payment of tax on helium under the terms of this Agreement cannot be relied upon by either party if a dispute arises as to the taxability of helium.
The parties agree the Howell and Yates agreements are unique and applicable only to valuation of raw gas produced by Exxon from the LaBarge Wellfields in Sublette County as a settlement of the present valuation controversy between Exxon and Defendants.
[Exhibit
804, pp. 100107-100108].
16. The
parties agree that the Department had the power to terminate the 1989 Tax Settlement
Agreement. [Tier 2 Transcript, Vol. I,
p. 150, Vol. III, p. 554, Vol. IV, p. 759].
17. The 1989
Tax Settlement Agreement treated revenues from the sale of helium produced from federal
lands as subject to taxation. [Exhibit 804, p. 100114]. Exxon disputed the power of state
and local governments to tax federal helium, and Section 2.e. reopened the issue of helium
taxation on termination of the agreement. [Findings, ¶ 15, sentences three and
five]. The Department agrees that termination of the 1989 Tax Settlement Agreement put the
issue of helium taxation back on the table. [Tier 2 Transcript, Vol. IV, p. 730].
18. The
Section 2.e. description of the Howell and Yates Agreements as a “comparison value”
was a central feature of the dispute resolved by this Board in ExxonMobil 2004. [Tier 2 Transcript,
Vol. IV, p. 767]. ExxonMobil and Sublette County argued that a comparison value was
the same as a comparable value within the meaning of Wyo. Stat. Ann. § 39-14-203(b)(vi).
The Board determined that 1989 Tax Settlement Agreement was instead a mutually agreed
method authorized by Wyo. Stat. Ann. § 39-14-203(b)(vii). ExxonMobil 2004, ¶¶ 269-278.
19. When it
enters into settlement agreements, the Department generally considers the terms of such
agreements to be binding. [Tier 2 Transcript, Vol III, p. 555].
20. In the
second and third paragraphs of its May 21st letter, the Department took pains
to explain how its prior use of the 1989 Tax Settlement Agreement was consistent with
statutory procedures for selecting a method to value ExxonMobil’s production:
On September 1, 2002, the Department sent a notice to all Oil & Gas taxpayers in the State advising them that the Department had selected the comparable value method for use in computing taxable value in instances where the oil & gas is not sold at or prior to the point of valuation in a bona fide arms-length sale. That method was to be used for 2003, 2004, and 2005 production years. Selection of the comparable value methodology was subject to, and recognized an exception for, mutually agreed-upon valuation approaches entered pursuant to statute.
Taxpayers who determined that the comparable value method could not be used to determine taxable value were required to notify the Department by October 30, 2002, and identify the method the taxpayer proposed to use in place of comparable value. Five taxpayers advised the Department in writing of their wish to utilize the proportionate profits method because they alleged that no comparable values existed. Exxon never advised the Department of its intention to utilize any other methodology and the Department did not anticipate that Exxon would because of the existence of the 1989 Settlement Agreement which had been in use for 13 years. This was consistent with the value selection letter.
[Exhibit 807, p. XOM 13928]. The general mechanics of
selecting a method, and the manner in which the 1989 Tax Settlement Agreement was
reconciled to statutory changes made in 1990, bear explanation.
21. Generally
speaking, Wyoming law requires the Department to notify oil and gas taxpayers of its
choice of one of four statutory valuation methods; to do so by September 1st
preceding the year when the method is first applied; and to use the same method for three
consecutive years. Wyo. Stat. Ann. § 39-14-203(b)(vi), (viii). Taxpayers must then
use the chosen method to report production to the Department. Wyo. Stat. Ann. §
39-14-207(a). Payment of severance taxes depends on calculations in monthly reports. Wyo.
Stat. Ann. §§ 39-14-207(a)(v), 39-14-207(b)(iii),(iv). Payment of ad valorem taxes
depends on calculations in an annual gross products report. Wyo. Stat. Ann. §§
39-14-207(a)(i), 39-14-207(b)(i),(ii), 39-13-102(m)(i), (o)(i).
22. After
the notification requirements became effective following adoption of the statute in 1990, Conclusions,
¶ 96, 97, the Department satisfied the statutory notification requirement by sending a
memorandum to all Wyoming oil and gas producers at three-year intervals. In these
memoranda, the Department has always selected the comparable value method for determining
taxable value. [Exhibit 836].
23. The most
recent in this series of memorandum notices was dated September 1, 2002. [Exhibit 836, p.
XOM 16530]. ExxonMobil acknowledged that it received the Department’s Memorandum. [Tier
2 Transcript, Vol. I, p. 173]. The Memorandum was the source of the directive, referenced
in the May 21st letter, for a taxpayer to notify the Department if the taxpayer
intended to use a method other than comparable value. [Exhibit 807, Exhibit 836, p. XOM
16530].
24. The
Department normally does not know what method a taxpayer actually uses when it reports
production. [Tier 2 Transcript, Vol. III, p. 540]. It is impractical for the Department to
check the method actually used when the reports arrive because there are so many of them
– as many as 40,000 annual gross products reports, and nearly twelve times as many
monthly severance tax reports. [Tier 2 Transcript, Vol. III, p. 541]. A wrong method, or
an improperly applied method, is typically not discovered until the taxpayer is audited.
[Tier 2 Transcript, Vol. III, p. 576].
25. The
Department views its triennial Memorandum as a blanket letter stating its preference for
the comparable value method. [Tier 2 Transcript, Vol. IV, p. 709; Exhibit 836]. The
Department viewed its general triennial Memorandum to all oil and gas taxpayers as
satisfying its specific notice obligations to ExxonMobil under Wyo. Stat. Ann. §
39-14-203(b)(vi). [Tier 2 Transcript, Vol. IV, pp. 715-716].
26. In many
cases, the comparable value method cannot be applied to the production in question. [Tier
2 Transcript, Vol. III, p. 577, Vol. IV, p. 681]. This is such a case. The Department has
denied the comparable value method was available to determine the value of LaBarge
production. Findings, ¶ 26. When the comparable value method is unavailable, the
Department generally prefers and accepts the statutory netback method as an alternative to
comparable value. [Tier 2 Transcript, Vol. IV, p. 709]. However, the netback method was
not available for ExxonMobil because the netback method cannot be used to determine the
taxable value of gas which is processed by the producer of the natural gas. Wyo. Stat.
Ann. § 39-14-203(b)(vi)(C).
27. While
the Department sent its 2002 triennial Memorandum to ExxonMobil, it expected to acquiesce
in ExxonMobil’s continued use of the 1989 Tax Settlement Agreement method. [Tier 2
Transcript, Vol. III, pp. 682-683]. This was so even though ExxonMobil did not respond to
the Department’s Memorandum, and the Department did not specifically direct ExxonMobil
to use the 1989 Tax Settlement Agreement method. [Tier 2 Transcript, Vol. III, p. 683,
Vol. IV, p. 735]. The Department assumed that ExxonMobil would use the 1989 Tax Settlement
Agreement method until the agreement was terminated. [Tier 2 Transcript, Vol. IV, p. 735].
28. The Board previously found and concluded the
Department relied upon its authority to agree to a mutually acceptable alternative
valuation method when it accepted values determined for the LaBarge production after
August 31, 1991 (the end of the initial term of the 1989 Tax Settlement Agreement). ExxonMobil
2004, ¶¶ 122-123, 278. The Director of the Department did not and does not want the
Board to reconsider those previous findings and conclusions. [Tier 2 Transcript,
Vol. IV, p. 777].
29. The
fourth paragraph of the May 21st letter specifically stated the Department’s
rationale for terminating the settlement agreement:
The Department believes that the methodology provided for in the 1989 Settlement Agreement does not reach fair market value for 2003 production year as is constitutionally required. Nor does the Department believe that the 1989 Settlement Agreement comports with the “Comparable Value” methodology that is provided for in Wyo. Statute § 39-14-203 (b)(vi)(B). Despite the protestations of ExxonMobil that the Settlement Agreement referred to in the Howell & Yates Agreement is a “comparison value”, the hybrid methodology used in the Settlement Agreement is most certainly not a comparable value as provided for under the existing statute. In fact, the statute was not even created until 1990 and the comparable value methodology does not allow many of the deductions that ExxonMobil is allowed under the settlement. For example, the Settlement Agreement allows ExxonMobil to deduct payments made to royalty and working interest owners, contrary to the existing statute.
[Exhibit 807, p. XOM 13929].
30. The
fourth paragraph refers to the Department’s reason for terminating the 1989 Tax
Settlement Agreement. Although the Department did not need a reason to terminate, the
Department’s rationale is useful for understanding the dispute between the parties, and
provides a context for a number of the Department’s legal arguments. We accordingly
address the Department’s rationale, and the related matter of how the Department reached
its decision, in some detail.
31. ExxonMobil
called two employees of the Department to testify to the history of the decision. They
were Ed Schmidt, Director of the Department since March, 2003 [Tier 2 Transcript, Vol. IV,
p. 739], and Randy Bolles, Administrator of the Department’s Mineral Tax Division until
October 24, 2004. [Tier 2 Transcript, Vol. II, p. 284]. Bolles now works for the Wyoming
Taxpayers Association, a public policy advocacy group whose Board includes representatives
of ExxonMobil and other major Wyoming mineral producers. [Tier 2 Transcript, Vol. II, p.
358].
32. Schmidt
became Director of the Department against a backdrop of sentiment, both in the Mineral Tax
Division of the Department and in the Department of Audit, that the 1989 Tax Settlement
Agreement should be extensively reviewed with an eye to adjustment. [Tier 2 Transcript,
Vol. II, pp. 289, 366, 377]. This sentiment was tempered by the understanding that there
were limited statutory alternatives to determine the value of LaBarge gas. [Tier 2
Transcript, Vol. II, p. 290]. Specifically, the Department believed the only available
alternative to the 1989 Tax Settlement Agreement was the proportionate profits method.
[Tier 2 Transcript, Vol. I, pp. 330, 332, 343].
33. The
proportionate profits method was not favored by the Department at the time. Bolles had
previously testified, in litigation and before the legislature, that the proportionate
profits method did not reach fair market value. [Tier 2 Transcript, Vol. II, pp. 331-332].
Bolles felt that use of the proportionate profits method to value LaBarge production would
reflect unfavorably on his credibility. [Tier 2 Transcript, Vol. II, p. 332].
34. The
Department nonetheless initiated a review of the 1989 Tax Settlement Agreement by a letter
from Schmidt to ExxonMobil dated June 4, 2003. [Tier 2 Transcript, Vol. II, p. 289;
Exhibit 835]. In this letter Schmidt indicated that the Department wished to determine
whether ExxonMobil’s valuation was “consistent with the constitutionally mandated fair
market value standard” for production year 2003 forward. [Exhibit 835]. The Department
requested a copy of the “contract between Exxon Mobil and the federal government
regarding the handling of helium produced from federal lands leased to Exxon Mobil at
Shute Creek.” [Exhibit 835]. The avowed purpose of this specific request was “to
determine the basis on which the original 1989 Tax Settlement Agreement indicated that the
taxability of helium might be at issue.” [Exhibit 835].
35. The
Department subsequently began talking to ExxonMobil about an alternative valuation method
in November and December of 2003. [Tier 2 Transcript, Vol. IV, p. 750].
36. This Board heard of the Appeal of the Sublette County Board of County Commissioners from January 12 to 29, 2004. ExxonMobil 2004, Digest. During that hearing, the parties explored the history, operations, and cost structures associated with LaBarge production, as well as the history and administration of the 1989 Tax Settlement Agreement. See ExxonMobil 2004, Findings of Fact, ¶¶ 1-253.
37. On
February 24, 2004, Bolles wrote a memorandum to Schmidt. [Exhibit 833]. He did so because
he was “frustrated” by the Director’s lack of guidance concerning pending audit
issues. [Tier 2 Transcript, Vol. II, p. 297]. Bolles made two main points. The first point
concerned a practical difficulty in preparing reliable proportionate profits calculations:
. . . Exxon’s accounting system is very complex and does not lend itself to the very complex and tedious task of classifying costs as direct production costs, direct processing costs and direct transportation costs. Exxon’s system is made up of “clearing accounts”, whereby expenses are cleared from larger accounts and allocated to detailed accounts. These accounts may be cleared many times before they come to rest in many sub-accounts that may be almost impossible to distinguish between production and/or processing functions . . . Under the DOR’s recent interpretation regarding dehydration and the point of valuation, those costs that were incurred for gathering systems, manifolds and other equipment would be production costs. However, it appears it would be very difficult to identify these costs and would be somewhat subjective. In addition, there is a certainty that costs that have been allocated to the lowest level would be split between multiple functions, such as production, processing and transportation. . .
[Exhibit 833]. We are unable to evaluate the validity of
this concern. However, the stated concern clearly supported a second point. Instead of
audits, Bolles preferred to devote resources to evaluating the Department’s legal
exposure “regarding the taxability of helium, point of valuation, the prohibition of the
netback method, etc., and make a decision as to the methodology that DOR will use for
2000-2002 audit period and for 2003 production period.” [Exhibit 833].
38. Bolles’
statement of this second point, urging a different use of the Department’s resources,
implied that the Department had not yet made a decision to terminate the 1989 Tax
Settlement Agreement. [Exhibit 833]. Under prompting of ExxonMobil counsel, Bolles
nonetheless conceded that the Department was on a “mission. . . to abandon the
settlement agreement . . . .” [Tier 2 Transcript, Vol. II, pp. 293, 300]. Despite the
Department’s inclination, it did not make a decision until after ExxonMobil filed its
annual gross products return for 2003 production on or about April 25, 2004. [Tier 2
Transcript, Vol. II, p. 293].
39. The
Department needed cost data for ExxonMobil’s processing plant to evaluate the results of
the proportionate profits method, which relies heavily on categorization of production and
processing costs. Wyo. Stat. Ann. § 39-14-203(b)(vi)(D). At some point during a
pending audit, the Department directed the Department of Audit to secure cost data for
production year 2002. [Tier 2 Transcript, Vol. II, pp. 410-412]. ExxonMobil provided this
data under the Department’s power to order a review of taxpayer records. [Tier 2
Transcript, Vol. II, p. 410]. The audit process would not have otherwise obliged
ExxonMobil to produce cost data, because the 1989 Tax Settlement Agreement calculates
taxable value on the basis of revenues only, with no attention to costs. [Tier 2
Transcript, Vol. II, p. 410]; see generally ExxonMobil 2004, ¶¶ 179-194,
212-213, 216-230. Tuan Pham is ExxonMobil’s authorized representative for matters
related to the calculation and reporting of severance and ad valorem taxes. [Tier 2 Transcript, Vol. I, p. 178]. Pham
recalled that ExxonMobil provided the 2002 cost data in late 2003 or early 2004. [Tier 2
Transcript, Vol. I, p. 155].
40. The
Department used ExxonMobil’s 2002 cost data to prepare a proportionate profits
calculation before it received ExxonMobil’s annual gross products report for 2003
production in April, 2004. Bolles recalled a comparison that showed “a difference in
taxable value that was somewhere around $8 million . . . Or maybe that was the tax number.”
[Tier 2 Transcript, Vol. II, p. 296]. He also recalled that when an adjustment was made
using the data in the annual gross products report, the difference was greater. [Tier 2
Transcript, Vol. II, p. 296]. Bolles’ inability to recall whether the $8 million was a
difference in taxable value or tax – two very different numbers – casts doubt on the
clarity of his recollection of the events in question.
41. We
accept Bolles’ testimony that the Department intended to “garner more taxable value
out of ExxonMobil on these properties” [Tier 2 Transcript, Vol. II, p. 295], but place
little weight on details of his testimony suggesting that the Department sought to
increase ExxonMobil’s taxable value for arbitrary reasons. It is in this light that we
view his suggestion that Director Schmidt felt that a taxable value of $50 million out of
revenue of $300 million was not enough. [Tier 2 Transcript, Vol. II, pp. 344-345]. In a
similar vein, Bolles recalled that Schmidt “made the comment to Exxon that Exxon had 32
billion in profit, so we just want a little piece of that.” [Tier 2 Transcript, Vol. II,
p. 375]. We place little weight on a comment plainly made from one party to another in the
heat of litigation.
42. At the
same time, we place a great deal of weight on the emphasis in Director Schmidt’s own
more temperate explanation. Schmidt believed that the 1989 Tax Settlement Agreement
methodology did not work properly in the new price environment of this decade. [Tier 2
Transcript, Vol. IV, pp. 745-747]. To Schmidt, the fixed deduction of 75% against revenue
decreased taxable value in an amount substantially in excess of ExxonMobil’s actual
processing expenses, which he viewed as relatively static. [Tier 2 Transcript, Vol. IV, p.
748]. Bolles expressed a similar thought when testifying that the formula in the 1989 Tax
Settlement Agreement should be modernized to work better in the current environment. [Tier
2 Transcript, Vol. II, p. 377].
43. There is
a corollary to the Department’s concern for recent changes in the price environment for
natural gas. The Department does not ask the Board to look back on the years that the 1989
Tax Settlement Agreement was in place, and find that there had been mistakes in earlier
administration of the settlement valuation method. [Tier 2 Transcript, Vol. IV, pp.
706-707].
44. The
Department presented evidence in its case to support Schmidt’s perception of changes in
the pricing environment for Wyoming natural gas. [Tier 2 Transcript, Vol. III, p. 588].
Relying on the publication Wyoming Geo-Notes, Department witness Craig Grenvik, the
current Administrator of the Mineral Tax Division, testified that average prices for
1990-1999 were $1.64 per thousand cubic feet (mcf), with a low of $1.13 per mcf in 1995.
[Exhibit 511; Tier 2 Transcript, Vol. III, p. 591]. For 2000 to November 2004, the average
price was $3.74 per mcf, with a low of $2.09 per mcf in 2002 and a high of $5.10 per mcf
in 2004. [Exhibit 511; Tier 2 Transcript, Vol. III, p. 591]. The Board takes notice that
Wyoming Geo-Notes is a quarterly publication of the Wyoming Geological Survey. At the time
of the hearing in September, Mr. Pham of ExxonMobil similarly reported that natural gas
prices were upwards of $10 per mcf. [Tier 2 Transcript, Vol. I, p. 102].
45. We
accept Schmidt’s testimony that he had made up his mind to terminate that 1989 Tax
Settlement Agreement unless the Board’s decision in ExxonMobil 2004 prohibited him
from doing so. [Tier 2 Transcript, Vol. IV, p. 761]. Schmidt was therefore able to reach a
final decision the day he read the Board’s decision, which accounts for the notice of
termination the day after the Board’s ruling was issued on May 20, 2004. [Tier 2
Transcript, Vol. IV, p. 761].
46. We accept Bolles’ testimony that no one in the Department considered the advance notice requirements of Wyo. Stat. Ann. § 39-14-203(b)(vi) before the May 21st letter was sent to ExxonMobil. [Tier 2 Transcript, Vol. II, p. 302].
47. In its case, the Department presented testimony and exhibits for the purpose of demonstrating that the 1989 Tax Settlement Agreement did not reach fair market value. [Tier 2 Transcript, Vol. III, pp. 639-641; Exhibit 523]. The Department called a single witness, Craig Grenvik, Administrator of the Mineral Tax Division of the Department at the time of the hearing. [Tier 2 Transcript, Vol. III, pp. 485-486, 538-539]. Because Mr. Grenvik was the Department’s only witness, we understood him to be the spokesman for the Department.
48. To
assess whether 1989 Tax Settlement Agreement reached fair market value, the Department
compared the results of two variants of the proportionate profits method, but relied most
heavily on a netback standard comprised of (1) ExxonMobil’s actual operating costs;(2)
the same sixty-year straight line depreciation reflected in cost data ExxonMobil used for
royalty reports to the federal Minerals Management Service (MMS); and (3) an estimated
return on investment at the rate of 10.5%. [Tier 2 Transcript, Vol. III, pp. 639-641, Vol.
IV, pp. 664, 673; Exhibit 523]. When a valuation method results in a deduction that
significantly exceeds the result of this netback yardstick, the Department concludes the
valuation method does not reach fair market value. [Tier 2 Transcript, Vol. IV, pp.
701-702].
49. The Department concedes application of its netback yardstick is subjective. [Tier 2 Transcript, Vol. IV, pp. 701-702]. According to Director Schmidt, the Department’s evaluation of the disparity between a deduction and actual costs was not a bright line test, but rather an exercise of the Department’s appraisal judgment. [Tier 2 Transcript, Vol. IV, p. 752].
50. In the
fifth paragraph of the May 21st letter, the Department rejected ExxonMobil’s
annual gross products tax return for the 2003 production year:
We therefore advise ExxonMobil that the Department does not intend to use the methodology provided for in the 1989 Settlement Agreement to value ExxonMobil’s 2003 production year. We are therefore rejecting your 2004 annual gross products tax return (2003 production year) and instruct you to amend your return utilizing the proportionate profits method as set forth in Wyo. Statute §39-14-203 (b)(vi)(D) and in accordance with the decision of the State Board of Equalization in Amoco Production Company v. Department of Revenue, Docket No. 96-216, September 24, 2001.
[Exhibit 807, p. XOM 13929]. Under separate cover, the
Department sent ExxonMobil a formal Return Rejection Notice dated three days later, May
24, 2004. [Exhibit 808].
51. By its
reference to the Board’s Docket No. 96-216, the Department was directing ExxonMobil to
include production taxes and royalties in direct costs of producing when calculating
taxable value under the proportionate profits method. The result of so doing is normally a
higher taxable value than if direct costs of producing do not include production taxes and
royalties. [Exhibit 523]. This issue has been the subject of more than a dozen decisions
of this Board. Conclusions of Law, ¶ 101. Appeals of the Board’s decisions are
pending in district courts and the Wyoming Supreme Court.
52. As of
May 21, 2004, ExxonMobil could not promptly amend its gross products return as directed by
the Department, because ExxonMobil did not have a cost accounting system in place to
report taxes under the proportionate profits methodology. [Tier 2 Transcript, Vol. I, pp.
152, 158]. ExxonMobil’s system for reporting taxes under the 1989 Tax Settlement
Agreement did not oblige ExxonMobil to look at or capture costs, since the Settlement
Agreement methodology was based principally on revenue. [Tier 2 Transcript, Vol. I, p.
153]. See ExxonMobil 2004, ¶¶ 88-111. ExxonMobil was accordingly obliged to learn
the details of the proportionate profits methodology, and determine how it would both get
the necessary data, then put that data together. [Tier 1 Transcript, Vol. I, p. 158]. It
did so under the threat of penalties and interest if its reporting were poor. [Tier 1
Transcript, Vol. I, p. 158]. ExxonMobil did not begin reporting with the proportionate
profits method until October, 2004. [Tier 1 Transcript, Vol. I, p. 159].
53. In the
sixth paragraph of the May 21st letter, the Department expressed its intention
to estimate a taxable value to fulfill its statutory duties to Sublette County:
Because it is necessary for the Department to certify Exxon’s values to Sublette County by June 1st and because we do not have Exxon’s cost information in order to complete an accurate proportionate profits calculation, we have prepared a “best information available” (Wyo. Statute § 39-14-208(a)(i)) calculation using Exxon’s 2003 gross revenues and its 2002 cost figures. A copy of the proportionate profits calculation is attached herewith as “Attachment A”. This is the taxable value that will be certified to Sublette County. We request that ExxonMobil provide the Department with its actual 2003 production, processing and transportation costs on or before June 30th so that the return can be amended to accurately reflect taxable value. The value certified to Sublette County will then be corrected by the Department and a Notice of Valuation change (NOVC) will be sent to the County.
[Exhibit 807, p. XOM 13929]. The referenced attachment did
not accompany the letter; Bolles provided the calculation to Pham by e-mail on June 3,
2004. [Exhibit 810]. Bolles confirmed that the Department planned from the outset to issue
a Notice of Valuation Change after receipt of 2003 cost data. [Tier 2 Transcript, Vol. II,
pp. 286-287].
54. The
Department’s June 1 deadline for certifying taxable value to Sublette County is
established by statute. Wyo. Stat. Ann. § 39-11-102(o)(i). However, the Department’s
Rules defer the certification date to July 1 for taxpayers extensions to facilitate accurate tax return preparation. Rules, Wyoming Department of Revenue,
Chapter 6, § 7(a)(i)(H).
55. In
the seventh paragraph of the May 21st letter, the Department directed
ExxonMobil to collect and pay severance taxes on all LaBarge production:
We require that ExxonMobil report and pay severance tax and report ad valorem taxable value on one-hundred percent (100%) of the production processed through the Shute Creek Plant. We will not allow working interest owners who are not physically taking their share of the products in kind to report as a “take-in-kind” owner without meeting the requirements of the Department of Revenue’s Rules, Chapter 6, Sec. 6. The Department will notify all the companies that have reported LaBarge production as “take-in-kind” and require amendments to be filed. Exxon will be assessed severance tax and the certified value will be based on the fact that ExxonMobil is responsible for marketing all of the products process through the Shute Creek Gas Plant for production year 2003. Since transfers of payments from one taxpayer to another are not allowed by the Department, ExxonMobil will be required to remit severance tax and report ad valorem taxable value that comports with the above requirements. The companies that reported in error as “take-in-kind” will need to file amended severance and ad valorem returns and to zero out volume and value previously reported. Those companies will receive refunds, or the funds will apply to other outstanding severance account liabilities. ExxonMobil and the other affected taxpayers will need to resolve the exchange of severance tax due to this reporting requirement.
[Exhibit 807, pp. XOM 13929, 13930].
56. According
to Bolles, the Department included this directive in the May 21st letter
because a staff member in the Department made the case that ExxonMobil was not being
treated the same as all other oil and gas taxpayers. [Tier 2 Transcript, Vol. II, pp.
382-383, Vol. III, pp. 508, 460-462].
57. Generally
speaking, the Department allows only operator reporting or take-in-kind reporting. [Tier 2
Transcript, Vol. III, p. 503]. A taxpayer must qualify for take-in-kind reporting. [Tier 2
Transcript, Vol. III, p. 503]. The Department reasoned that ExxonMobil, as operator of the
LaBarge well fields, was obliged report and remit taxes because the working interest
owners in the fields, EOG (Howell’s successor) and Yates, did not qualify as
take-in-kind owners. [Tier 2 Transcript, Vol. III, p. 503]. EOG and Yates did not meet the
definitions of the pertinent Department Rule because they did not elect to separately
dispose of their shares of LaBarge natural gas. [Tier 2 Transcript, Vol. III, pp. 461,
504]. Rules, Department of Revenue, Chapter 6, § 4b(s).
58. The
Department believes that its insistence on operator reporting is supported by Wyo. Stat.
Ann. § 39-14-203(c)(ii) and (iii). [Tier 2 Transcript, Vol. III, p. 505]. Paragraph
(c)(iii) authorizes an operator to deduct taxes from remittances to working interest
owners. [Tier 2 Transcript, Vol. III, p. 505]. In this case, the Department expected
ExxonMobil to withhold severance and ad valorem taxes from its payments to EOG and Yates.
[Tier 2 Transcript, Vol. III, p. 495]; Findings, ¶ 55.
59. The
Department demonstrated practical administrative reasons for its general policy. If all
working interest owners were to report separately, the Department would be forced to
process 31,000 oil and gas returns each month, and 31,000 annual reports, rather than
7,000 as it does now. [Tier 2 Transcript, Vol. III, p. 506]. In addition, the Department
already discovers thousands of discrepancies between what field operators report, and what
take-in-kind owners report from the same fields. [Tier 2 Transcript, Vol. III, p. 507]. If
more working interest owners were allowed to report separately, there would be more
discrepancies, and reconciliation of reporting from the same field would become “nearly
impossible.” [Tier 2 Transcript, Vol. III, pp. 506-507]. The Department would also have
to know more than it now does about the operating agreements between operators and their
working interest owners. [Tier 2 Transcript, Vol. III, p. 509]. Finally, in the Department’s
experience, working interest owners are not as sophisticated as operators, so the
Department believes more staff would be required to assure compliance with the law. [Tier
2 Transcript, Vol. III, p. 507]. We accept this testimony.
60. ExxonMobil,
EOG, and Yates were allowed to report in a way contrary to the norm, due to practices
established under the 1989 Tax Settlement Agreement. [Tier 2 Transcript, Vol. III, p.
462]. For the Fogarty Creek unit, ExxonMobil had consistently reported the volumes of gas
associated with the working interest owners as take-in-kind volumes. [Joint Stipulation
of Facts, ¶ 32]. The reason for doing so was that each of the working interest owners
was to file its own tax returns, and the Department did not have a special form that
suited the circumstances of LaBarge production. [Joint Stipulation of Facts, ¶
32]. Before 2004, the Department never requested an alternative to this form of reporting.
[Joint Stipulation of Facts, ¶ 32]. As a result, ExxonMobil was reporting 100% of
production from the LaBarge fields, but not paying taxes for the working interest owners,
who filed their own returns and paid taxes based on those returns. [Tier 2 Transcript,
Vol. III, p. 481].
61. The
reporting arrangement under the 1989 Tax Settlement Agreement masked a unresolved issue
between the Department and the working interest owners. While EOG and Yates owned no
working interest in the federal helium produced from the LaBarge field [Tier 2 Transcript,
Vol. III, p. 499], they nonetheless received a payment for helium under the terms of their
Processing Agreements with ExxonMobil. [Exhibit 802, ¶ 12.3; Exhibit 803, ¶ 12.3]. The
Department believed that EOG and Yates owed severance and ad valorem taxes on the helium
payments. [Tier 2 Transcript, Vol. III, p. 499]. Yet at the time of the hearing in this
case, the Department did not know what position EOG and Yates were taking on state and
local power to tax federal helium [Tier 2 Transcript, Vol. III, p. 500] – thereby
strongly suggesting that EOG and Yates did not intend to pay severance and ad valorem
taxes on the helium proceeds from ExxonMobil.
62. Consistent
with its directive to ExxonMobil, the Department also directed EOG and Yates to zero out
their tax reports, i.e., to report no value in anticipation of ExxonMobil’s reporting
and payment for all production. [Tier 2 Transcript, Vol. II, p. 326]. Bolles conceded that
the Department did not give any specific consideration to the tax computation problems
ExxonMobil would encounter. [Tier 2 Transcript, Vol. II, p. 322]. One such problem was how
to calculate the tax burden of EOG and Yates. They were working interest owners without an
interest in the plant, and therefore without a meaningful basis to allocate production and
processing costs under the proportionate profits method. [Tier 2 Transcript, Vol, I, p.
76, Vol. II, pp. 324-326]. Another problem was establishing the proper point of valuation.
[Tier 2 Transcript, Vol, I, p. 76]. Following termination of the 1989 Tax Settlement
Agreement, the Department intended to disallow a portion ExxonMobil’s 75% processing
fee, on the grounds that 75% fee covered services all the way to the wellhead. The
Department believes the proper point of valuation was at the outlet of the Black Canyon
Dehydration facility. [Tier 2 Transcript, Vol. III, p. 493].
63. Faced
with these difficulties, ExxonMobil simply ignored the Department’s directive to pay EOG
and Yates severance and ad valorem taxes. [Tier 2 Transcript, Vol. I, p. 168].
64. In the
eighth paragraph of the May 21st letter, the Department directed ExxonMobil
regarding two aspects of the proportionate profits method:
In addition, we require that ExxonMobil report and pay production taxes on the fair market value of all products, including helium, at the statutorily defined point of valuation. In accordance with Wyo. Statute § 39-14-203(b)(iv), the production process is completed at the outlet of the initial dehydrator, which for this production is the outlet of the Black Canyon Dehydration Facility. Any costs incurred prior to the outlet of the Black Canyon Dehydration Facility are not deductible in accordance with Wyo. Statute § 39-14-203(b)(ii).
[Exhibit 807, p. XOM 13930]. As we have already noted,
termination of the 1989 Tax Settlement Agreement in favor of the proportionate profits
method immediately created disputes regarding the taxation of helium, Findings, ¶
17; whether production taxes and royalties must be treated as direct costs of processing, Findings,
¶ 51; and the location of the point of valuation, Findings, ¶ 62. The Department
was aware of these issues when it elected to terminate the 1989 Tax Settlement Agreement.
[Tier 2 Transcript, Vol. IV, pp. 763-764].
65. More
important, the Department acknowledged that “multiple questions surrounding what would
be the ultimate taxable value” had been the longstanding motivation for leaving the 1989
Tax Settlement Agreement in place. [Tier 2 Transcript, Vol. III, p. 564]. We agree many
questions surround the correct determination of a taxable value.
66. ExxonMobil
prepared a confidential exhibit to show, among other things, the large spread of taxable
values that can be calculated using the proportionate profits method, depending on which
party prevails on its views about application of the proportionate profits methodology.
[Confidential Exhibits 161, 162, 163, 164]. If ExxonMobil prevailed on all of its issues
for production year 2003, the resulting taxable value would be only 23% of the value that
would result if the Department prevailed on all issues. [Confidential Exhibit 161]. If
ExxonMobil prevailed on all of its issues for production year 2004, the resulting taxable
value would be 20% of the value that would result if the Department prevailed on all
issues. [Confidential Exhibit 163].
67. While we
are satisfied with the general picture shown by ExxonMobil’s proportionate profits
calculations, there are numerous problems affecting the accuracy of calculation details.
ExxonMobil’s calculations relied on cost data it used for royalty reports to the federal
Minerals Management Service (MMS). [Tier 2 Transcript, Vol. I, pp. 159-162]. (The MMS cost
data are also the source of the 2002 data that the Department earlier received from
ExxonMobil, and relied upon for its own calculations before May 21. Findings, ¶
39.) For the calculations presented during the hearing of this matter, ExxonMobil adjusted
the MMS data by removing certain field gathering expenses that it determined were actually
costs of the well site, amounting to about $6.6 million for production year 2003 – a
material adjustment about which we have insufficient information to evaluate. [Tier 2
Transcript, Vol. I, p. 161]. Further, the MMS data is not audited. [Tier 2 Transcript,
Vol. I, p. 89]. Audits invariably result in changes to cost figures, so all of the
calculations must be taken with a grain of salt. [Tier 2 Transcript, Vol. II, p. 448, Vol.
IV, p. 724]. We are not in a position to judge the validity of Bolles’ previously
expressed concern for how difficult an audit will be. Findings, ¶ 37.
68. Representatives
of ExxonMobil and the Department met on June 9, 2004, to discuss issues raised by the May
21st letter. [Tier 2 Transcript, Vol. I, p. 67].
69. ExxonMobil
filed a single notice of appeal on June 18, 2004, which the Board docketed as two separate
matters, one for the May 21st letter [Exhibit 807] and the other for the
subsequent notice of valuation [Exhibit 809]. [Notices of Appeal, Docket Nos.
2004-84 & 2005-85; Tier 2 Transcript, Vol. I, p. 78].
70. On July
10, 2004, Pham of ExxonMobil sent Bolles a letter memorializing a variety of disputed
points. Some of these points were new. For example, ExxonMobil questioned the cost
classification of helium payments to the federal government, even assuming helium was
taxable; questioned the Department’s authority to issue a best information assessment;
questioned the Department’s intentions for production years 2004 and 2005; and
complained of the burdens arising from the Department’s demands. [Exhibit 811]. Some of
ExxonMobil’s points echoed issues we have already noted, including ExxonMobil’s
capacity to change its tax reporting system on short notice:
. . . [O]ur accounting system was not designed for a proportionate profits calculation and, since we have not had any advance warning about this change in methods, we have not had an opportunity to do our own analysis of the correct use of internal cost data for the calculation. The best we can do is present our cost accounts. We can make no representation at this time about what constitutes a production cost, or a processing cost, etc.
[Exhibit 811, p. XOM 15755].
71. The
Department addressed many of these issues by letter dated July 22, 2004. [Exhibit 812]. In
particular, the Department responded that it would require ExxonMobil to use the
proportionate profits method “for production year 2004 and beyond.” [Exhibit 812, p.
XOM 13964; Tier 2 Transcript, Vol. II, p. 328]. The Department considered this letter to
be notice of its selection of the proportionate profits method for production year 2005,
and ExxonMobil understood the directive to embrace production years 2005 through 2007.
[Exhibit 824].
72. The
Department did not make calculations specifically pertaining to its decision for
production year 2004, because production year 2004 data would not be available until
April, 2005. [Tier 2 Transcript, Vol. II, p. 352].
73. On
August 15, 2004, ExxonMobil transmitted “the 2003 costs data at the LaBarge operation as
compiled and used for the MMS royalty calculation.” [Exhibit 813]. The listing of MMS
data did not at this time exclude $6.6 million of field gathering costs later determined
to be well site expense. [Exhibit 813, p. 15764]; Findings, ¶ 67.
74. On August 20, 2004, ExxonMobil filed a timely notice of appeal of the Department’s July 22, 2004, decision to require use of the proportionate profits method for production year 2004. [Notice of Appeal, Docket No. 2004-120; Tier 2 Transcript, Vol. I, p. 78].
75. On
October 15, 2004, the Department issued a corrected re-valuation of taxes for the LaBarge
operation based on the 2003 costs data. [Exhibit 815]. The Department issued a related
Notice of Valuation Change to the Sublette County Assessor, dated November 8, 2004.
[Exhibit 816]. ExxonMobil filed a timely notice of appeal of these corrected valuations on
November 12, 2004. [Notice of Appeal Docket No. 2004-140; Tier 2 Transcript, Vol.
I, p. 78].
76. On joint
motion of the parties, the Board consolidated the four separate appeals on April 7, 2005.
[Order on Motion to Consolidate].
77. ExxonMobil filed its annual gross products return for production year 2004 on or about April 26, 2005. [Exhibit 825]. The valuation resulting from that filing is the subject of a separate appeal and therefore is not before the Board in this proceeding. [Tier 2 Transcript, Vol. I, p. 81]; State Board of Equalization Docket 2005-67.
78. On
August 25, 2005, the Department sent ExxonMobil new directions for reporting and valuing
the natural gas of working interest owners EOG and Yates. [Exhibit 205]. Generally
speaking, the Department directed ExxonMobil to report and value the EOG and Yates
production using the statutory netback method. [Exhibit 205]. Under these directions,
ExxonMobil was to consider the EOG and Yates shares of helium proceeds to be taxable, and
to use the outlet of the Black Canyon Dehydration Plant as the point of valuation.
[Exhibit 205].
79. While Tuan Pham protested certain aspects of the proposed tax calculations for the working interest owners [Tier 2 Transcript, Vol. I, pp. 82-86, 187-192], ExxonMobil’s complaint boils down to not wanting to be the middleman in a dispute between the Department and the working interest owners over the taxability of the EOG and Yates helium proceeds under their respective settlement agreements with ExxonMobil. [Tier 2 Transcript, Vol. I, pp. 193-197]. ExxonMobil otherwise is the source of, and hence controls, all revenue and cost data the working interest owners need to report taxable value. [Tier 2 Transcript, Vol. I, pp. 193-197].
80. ExxonMobil
still has made no effort to report and pay working interest owner taxes as directed by the
Department. [Tier 2 Transcript, Vol. III, pp. 536-537]; Findings, ¶ 63.
81. In its
own case in Tier 2 of this proceeding, the Department presented testimony on two matters
that reflected elements both of Departmental policy, and of the Department’s
interpretation of Wyoming statutes. These two matters were (1) whether a mutually agreed
method can be used when a statutory method is available, and (2) the Department’s power
to modify a selected method after receipt of an annual gross products return. The Board
customarily hears and considers testimony of this nature.
82. The
Department claimed that it could not use a mutually acceptable alternative valuation
method under Wyo. Stat. Ann. § 39-14-203(b)(vii) if it determined one of the statutory
valuation methods of Wyo. Stat. Ann. § 39-14-203(b)(vi) “can be used.” [Tier 2 Transcript, Vol. III, p. 563].
The factual predicate for this argument in not in dispute. Pham testified that Exxon Mobil
has always believed the proportionate profits method could be applied. [Tier 2 Transcript, Vol. I, p. 115].
The immediate implication of this fact is that the proportionate profits method became
available as soon as the original term of the 1989 Tax Settlement Agreement expired on
August 31, 1991. [Exhibit 804, p. 100107, quoted in Findings, ¶ 15]. However, the
Board previously addressed the status of the 1989 Tax Settlement Agreement under the 1990
statutes, and the Department does not wish to disturb those previous findings and
conclusions. Findings, ¶ 28. The Department cannot have it both ways. We have
rejected the Department’s claim as a matter of law, and in so doing have incorporated
other Findings of Fact from this case in our analysis. Conclusions, ¶¶ 136-146.
83. The
Department also presented evidence that it could not fully evaluate the results of the
1989 Tax Settlement Agreement for production year 2003 until it received ExxonMobil’s
gross products returns in April, 2004. Based on this fact, the Department claimed to
possess the power to change methods following the taxpayer’s submission of an annual
gross products report. [Tier 2
Transcript, Vol. III, pp. 549, 557-559]. This argument fails to make the important
distinction between the selection and application of a method.
84. The Department’s reasoning is sound with respect to application of a selected method. When a taxpayer applies the wrong method, or improperly applies the Department’s selected method, the error is typically not discovered until audit. [Tier 2 Transcript, Vol. III, p. 576]. The Department’s ability to review reported values is generally essential in Wyoming’s self-reporting environment, where the Department commonly accepts the values reported by a taxpayer. [Tier 2 Transcript, Vol. IV, p. 711]. Further, the Department may at any time learn that a change of circumstances has rendered a selected method inapplicable by law. The Department testified to the example of a business acquisition that resulted in producer-processor status for a natural gas producer, foreclosing use of the statutory netback method. [Tier 2 Transcript, Vol. III, p. 571]; Wyo. Stat. Ann. § 39-14-203(b)(vi)(C).
85. At the
same time, we find that the Department did not demonstrate, as a proposition of fact, that
ExxonMobil should never have used the 1989 Tax Settlement Agreement to value production
year 2003. Specifically, the Department did not demonstrate changes in the business
structure of ExxonMobil, or the structure of its sales transactions. [Compare Tier 2 Transcript, Vol. III,
p. 571]. The Department did not demonstrate the 1989 Tax Settlement Agreement
returned no taxable value at all. [Compare Tier 2 Transcript, Vol. III, p. 585].
The Department did not demonstrate ExxonMobil was directed to use an available statutory
method but defied the Department’s directive. Compare Whitney Canyon 2000. To the
contrary, the Department concluded that the comparable value method selected for all oil
and gas taxpayers could not be applied to LaBarge production, and expected ExxonMobil to
report value under the settlement method. [Tier 2 Transcript, Vol. III, p. 556]; Findings,
¶ 27. The Department did not demonstrate that ExxonMobil improperly applied the 1989 Tax
Settlement Agreement method, or in some way misled the Department concerning the premises
for its selection.
86. The
application of various statutory deadlines to the facts of this case is not in dispute.
The September 1st before production year 2003 was September 1, 2002. The
September 1st before production year 2004 was September 1, 2003. The September
1st before production year 2005 was September 1, 2004.
87. Pham testified that ExxonMobil has no issues
with the adequacy of the Department’s notice that ExxonMobil should report and pay its
production year 2005 taxes using the proportionate profits method. [Tier 2 Transcript,
Vol. I, p. 159]. We agree and so find.
88. The
Department believes that any issues created by its directive to ExxonMobil to report and
pay the taxes of working interest owners are independent of, and unrelated to, other
issues concerning termination of the 1989 Tax Settlement Agreement. [Tier 2 Transcript, Vol. III, p. 519].
We agree that the issue of the Department’s authority to require ExxonMobil to pay the
taxes of working interest owners is independent of the notice issue.
89. Any portion of the Conclusions of Law:
Principles of Law or the Conclusions of Law: Application of Principles of Law set forth
below which includes a Finding of Fact may also be considered a Finding of Fact and,
therefore, is incorporated herein by reference.
CONCLUSIONS OF LAW -
PRINCIPLES OF LAW
90. The
Wyoming Constitution requires the gross product of mines to be taxed “in proportion to
the value thereof” and “uniformly valued for tax purposes at full value as defined by
the legislature.” Wyo. Const. art. 15, §§ 3, 11. Further, “[a]ll taxation
shall be equal and uniform within each class of property. The legislature shall prescribe
such regulations as shall secure a just valuation for taxation of all property, real and
personal.” Wyo. Const. art. 15, § 11(d).
91. The
Department is generally required to provide for the valuation of natural gas as follows:
(i) The department shall annually value and assess. . . natural gas production at its fair market value for taxation;
(ii) Based upon the information received or procured pursuant to W. S. 39-14-207(a) or 39-14-208(a), the department shall annually value. . . natural gas for the preceding calendar year in appropriate unit measures at the fair market value of the product, after the mining or production process is completed;
(iii) Annually, on or before June 1, or as soon thereafter as the fair market value is determined, the department shall certify the valuation determined by the department to the county assessor of the county from which the. . . natural gas was produced to be entered upon the assessment rolls of the county. . .
Wyo.
Stat. Ann. § 39-14-202(a).
92. For
natural gas, the “‘[v]alue of the gross product’ means fair market value as prescribed by W. S. 39-14-203(b) less any deductions
and exemption allowed by Wyoming law or rules.” Wyo. Stat. Ann. § 39-14-201(a)(xxix)
[Emphasis supplied].
93. The
Legislature has provided that the taxable event for natural gas is as follows:
There is levied a severance tax on the value of the gross product extracted for the privilege of severing or extracting. . . natural gas in this state.
Wyo. Stat. Ann. § 39-14-203(a)(i).
94. The fair
market value for natural gas must be determined “after the production process is
completed.” Wyo. Stat. Ann. § 39-14-203(b)(ii). Expenses “incurred by the producer prior
to the point of valuation are not deductible in determining the fair market value of the
mineral.” Wyo. Stat. Ann. § 39-14-203(b)(ii).
95. “The production process for natural gas is completed after extracting
from the well, gathering, separating, injecting, and any other activity which occurs
before the outlet of the initial dehydrator. When no dehydration is performed, other than
within a processing facility, the production process is completed at the inlet of the
initial transportation related compressor, custody transfer meter or processing facility,
whichever occurs first.” Wyo. Stat. Ann. § 39-14-203(b)(iv).
96. If
the producer does not sell its natural gas prior to the point of valuation “by a bona
fide arms-length sale,” the Department must identify the method it intends to apply to
determine fair market value, and “notify the taxpayer of that method on or before
September 1 of the year preceding the year for which the method shall be employed.” Wyo.
Stat. Ann. § 39-14-203(b)(vi).
97. The
Department may unilaterally employ only one of four methods to determine fair market value
of natural gas not sold at or prior to the point of valuation. Wyo. Stat. Ann. §
39-14-203(b)(vi). The methods are:
(A) Comparable sales – The fair market value is the representative arms-length market price for minerals of like quality and quantity used or sold at the point of valuation provided in paragraphs (iii) and (iv) of this subsection taking into consideration the location, terms and conditions under which the minerals are being used or sold;
(B) Comparable value – The fair market value is the arms-length sales price less processing and transportation fees charged to other parties for minerals of like quantity, taking into consideration the quality, terms and conditions under which the minerals are being processed or transported;
(C) Netback – The fair market value is the sales price minus expenses incurred by the producer for transporting produced minerals to the point of sale and third party processing fees. The netback method shall not be utilized in determining the taxable value of natural gas which is processed by the producer of the natural gas;
(D) Proportionate profits – The fair market value is:
(I) The total amount received from the sale of the minerals minus exempt royalties, nonexempt royalties and production taxes times the quotient of the direct cost of producing the minerals divided by the direct cost of producing, processing and transporting the minerals; plus
(II) Nonexempt royalties and production taxes.
Wyo.
Stat. Ann. § 39-14-203(b)(vi). The Legislature prescribed these methods in 1990. 1990
Wyo. Session Laws, Ch. 54.
98. “When
the taxpayer and the department jointly agree, that the application of one (1) of the
methods listed in paragraph (vi) of [Wyo. Stat. Ann. § 39-14-203(b)] does not produce a
representative fair market value for the . . . natural gas production, a mutually
acceptable alternative method may be applied.” Wyo. Stat. Ann. § 39-14-203(b)(vii).
99. “If
the fair market value of the . . . natural gas production . . . is determined pursuant to
paragraph (vi) of [Wyo. Stat. Ann. § 39-14-203(b)], the method employed shall be used in
computing taxes for three (3) years including the year in which it is first applied or
until changed by mutual agreement between the department and the taxpayer. If the taxpayer
believes the valuation method selected by the department does not accurately reflect the
fair market value of the . . . natural gas, the taxpayer may appeal to the board of
equalization for a change of methods within one (1) year from the date when the department
notified the taxpayer of the method selected.” Wyo. Stat. Ann. § 39-14-203(b)(viii).
100. “If the department fails to notify the taxpayer of the method selected pursuant to paragraph (vi) of this subsection, the taxpayer shall select a method and inform the department. The method selected by the taxpayer shall be used in computing taxes for three (3) years including the year in which it is first applied or until changed by mutual agreement between the taxpayer and the department. If the department believes the valuation technique selected by the taxpayer does not accurately reflect the fair market value of the . . . natural gas, the department may appeal to the board of equalization for a change of methods within one (1) year from the date the taxpayer notified the department of the method selected.” Wyo. Stat. Ann. § 39-14-203(b)(ix).
101. The Board previously interpreted a key phrase employed in the proportionate profits method. “Direct cost of producing the minerals” includes production taxes, and includes royalties. BP American Production Co., Docket No. 2004-129, November 18, 2005, 2005 WL 3126198 (Wyo. St. Bd. Eq.); BP American Production Co., Docket No. 2004-130, November 10, 2005, 2005 WL 3072921 (Wyo. St. Bd. Eq.); Burlington Resources/LL&E, Docket No. 2004-24, August 25, 2005, 2005 WL 2100264 (Wyo. St. Bd. Eq.); Chevron U. S. A., Inc., Docket No. 2003-153, May 12, 2005, 2005 WL 1177542 (Wyo. St. Bd. Eq.); Marathon Oil Co., Docket No. 2004-08, March 29, 2005, 2005 WL 794788 (Wyo. St. Bd. Eq.); BP America Production Co., Docket No. 2003-114, March 18, 2005, 2005 WL 676580 (Wyo. St. Bd. Eq.); BP America Production Co., Docket No. 2003-102, March 3, 2005, 2005 WL 558991 (Wyo. St. Bd. Eq.); Chevron U.S.A., Inc., Docket Nos. 2002-50, et al., June 2, 2004, 2004 WL 1294512 (Wyo. St. Bd. Eq.); Burlington Resources Oil & Gas Co., Docket No. 2002-49, et al., May 10, 2004, 2004 WL 1174649 (Wyo. St. Bd. Eq.); RME Petroleum Company, Docket No. 2002-52, Nov. 20, 2003, 2003 WL 22814612 (Wyo. St. Bd. Eq.); Fremont County, Docket No. 2000-203, April 30, 2003, 2003 WL 21774604 (Wyo. St. Bd. Eq.).
102. The Wyoming Supreme Court has summarized the process used to value mineral production:
The process of “valuing” mineral production for tax purposes is lengthy, involving these steps:
1. The taxpayer files monthly severance tax returns. Wyo. Stat. Ann. § 39-14-207(a)(v) (LexisNexis 2001).
2. The taxpayer files an ad valorem tax return by February 25 in the year following production, and certifies its accuracy under oath. Wyo. Stat. Ann. § 39-14-207(a)(i) (LexisNexis 2001).
3. The Department of Revenue values the production at its fair market value based on the taxpayer’s ad valorem return. Wyo. Stat. Ann. § 39-14-202(a)(ii) (LexisNexis 2001).
4. The Department of Revenue then certifies the valuation to the county assessor of the county the minerals were produced in to be entered on the assessment rolls of the county. Wyo. Stat. Ann. § 39-14-202(a)(iii) (LexisNexis 2001).
5. The taxpayer then has one year to file an amended ad valorem return requesting a refund. Wyo. Stat. Ann. § 39-14-209(c)(i) (LexisNexis 2001).
6. The Department of Audit has five years from the date the return is filed to begin an audit, and must complete the audit within two years. Wyo. Stat. Ann. § 39-14-208(b)(iii), (v)(D), (vii) (LexisNexis 2001).
7. Any assessment resulting from an audit must be issued within one year after the audit is complete. Wyo. Stat. Ann. § 39-14-208(b)(v)(E) (LexisNexis 2001).
Board of County Commissioners of Sublette County v. Exxon Mobil Corporation, 2002 WY 151, ¶ 11, 55 P.3d 714, 719 (Wyo. 2002). (Commencing January 1, 2003, the time frame for audits was reduced. See Wyo. Stat. Ann. § 39-14-208(b)(vii).)
103. A natural gas taxpayer is obliged to file tax reports and returns, as follows:
(i) Annually, on or before February 25 of the year following the year of production any person whose .... natural gas production is subject to W. S. 39-14-202(a) shall sign under oath and submit a statement listing the information relative to the production and affairs of the company as the department may require to assess the production;
* * *
(v) Except as provided in subparagraph (vi) of this subsection, each taxpayer liable for severance taxes under W. S. 39-14-203(a) shall report monthly to the department. The monthly tax reports are due on or before the twenty-fifth day of the second month following the month of production. Reports shall be filed on forms prescribed by the department. The department may allow extensions for filing returns by regulation;
(vi) If a taxpayer’s liability for severance taxes is less than thirty thousand dollars ($30,000.00) for the preceding calendar year, monthly reporting requirements are waived and the taxpayer shall report annually....
Wyo. Stat. Ann. § 39-14-207(a).
104. The Department’s Rules provide:
Gross products filing dates for oil and natural gas reports;
(I) The statutory due date for annual oil and natural gas reports is February 25th of the year following the production year.
(II) Extensions of time to file these reports, for up to 60 days, may be granted for cause. Extension requests must be in writing and be received by the Mineral Tax Division prior to the statutory due date....
Rules, Wyoming Department of Revenue, Chapter 6, § 7(a)(i)(G).
105. “If the statement provided by W. S. 39-14-207(a)(i) is not filed, the department shall value the . . . natural gas production from the best information available. The department may use information other than contained in the statement provided by W. S. 39-14-207(a)(i) to determine the fair market value of the production provided by W. S. 39-14-202(a). . .” Wyo. Stat. Ann. § 39-14-208(a).
106. “W. S. 39-2-201 [now Wyo. Stat. Ann. § 39-14-202(a)(iii)] requires the Department of Revenue to certify the annual oil and natural gas valuation of the counties on June 1, or as soon thereafter as the fair market value is determined. Taxpayers may be granted filing extensions to allows sufficient time for accurate tax return preparation. To accommodate the extended reporting deadlines, annual fair market value determinations and certifications will be deferred until July 1.” Rules, Wyoming Department of Revenue, Chapter 6, § 7(a)(i)(H).
107. A taxpayer “aggrieved by any final administrative decision of the department may appeal to the state board of equalization.” Wyo. Stat. Ann. § 39-14-209(b)(i). Oil and gas taxpayers are entitled to this remedy:
Following [the Department’s] determination of the fair market value of... natural gas production the department shall notify the taxpayer by mail of the assessed value. The person assessed may file written objections to the assessment with the state board of equalization within thirty (30) days of the date of postmark and appear before the board at a time specified by the board...
Wyo. Stat. Ann. § 39-14-209(b)(iv).
108. The Board shall “review final decisions of the department upon application of any interested person adversely affected . . . under the contested case procedures of the Wyoming Administrative Procedure Act . . .. In addition, the board shall:
(i) Manage its internal affairs and prescribe rules of practice and procedure;
* * *(iv) Decide all questions that may arise with reference to the construction of any statute affecting the assessment, levy and collection of taxes, in accordance with the rules, regulations, orders and instructions prescribed by the department:
(A) Upon application of any person adversely affected...
* * *
(viii) Hold hearings after due notice in the manner and form prescribed by the Wyoming Administrative Procedure Act and its own rules and regulation of practice and procedure . . .
Wyo. Stat. Ann. § 39-11-102.1(c).
109. The Board’s Rules describe a petitioner’s burden of going forward, and its burden of persuasion:
Except as specifically provided by law or in this section, the Petitioner shall have the burden of going forward and the ultimate burden of persuasion, which burden shall be met by a preponderance of the evidence. If Petitioner provides sufficient evidence to suggest the Department determination is incorrect, the burden shifts to the Department to defend its action. . .
Rules, Wyoming State Board of Equalization, Chapter 2, § 20.
110. The initial step in arriving at a correct interpretation of a statute is an enquiry respecting the ordinary and obvious meaning of the words employed according to their arrangement and connection. A statute must be construed as a whole in order to ascertain its intent and general purpose and also the meaning of each part. We give effect to every word, clause and sentence and construe all components of a statute in pari materia. Parker Land & Cattle Company v. Wyoming Game and Fish Commission, 845 P.2d 1040, 1042 (Wyo. 1993); Stewart Title Guaranty Company v. Tilden, 2005 WY 53, ¶ 10, 110 P.3d 865, 871 (Wyo. 2005).
111. A special provision that has been promulgated by statute prevails over general provisions. Matter of Lyles, 957 P.2d 843, 846 (Wyo. 1998).
112. The Wyoming Supreme Court has consistently stated two principles concerning settlements:
A settlement agreement is a contract that is subject to the legal principles applicable to any contract. . .
We have long held that the policy of the court is to encourage settling claims without litigation. . .
Kendrick v. Barker, 2001 WY 2, ¶¶ 12,18,15 P.3d 734, 738-740 (Wyo. 2001).
113. “According to our established standards for interpretation of contracts, the words used in the contract are afforded the plain meaning that a reasonable person would give them. . . The determination of the parties’ intent is our prime focus in interpreting or construing a contract. . .” Caballo Coal Company v. Fidelity Exploration & Production Company, 2004 WY 6, ¶ 11, 84 P.3d 311, 314 (Wyo. 2004).
114. “The Wyoming Supreme Court unequivocally held that Tax Settlement Agreement is of continuing force and effect. The Department is therefore bound first and foremost by the Tax Settlement Agreement, which took on the character of a judicial decree. Exxon Corporation, 987 P.2d 165. The subsequent 1990 statute governed the actions of the Department only to the extent that the requirements of the 1990 statute were not inconsistent with the requirements of the Tax Settlement Agreement.” Exxon Mobil 2004, Conclusions, ¶ 265.
115. Agency rules and regulations adopted pursuant to statutory authority have the force and effect of law, and courts will defer to an agency’s construction of its own rules unless such construction is clearly erroneous or inconsistent with the plain meaning of the rules. Doidge v. State Board of Charities and Reform, 789 P.2d 880, 883-884 (Wyo. 1990); Swift v. Sublette County Board of County Commissioners, 2002 WY 32, ¶10, 40 P.3d 1235, 1238 (2002).
116. Wyoming Statutes provide:
(c) Taxpayer. The following shall apply:
(i) In the case of ad valorem taxes on crude oil, lease condensate or natural gas produced under lease, the lessor is liable for the payment of ad valorem taxes on crude oil, lease condensate or natural gas production removed only to the extent of the lessor's retained interest under the lease, whether royalty or otherwise, and the lessee or his assignee is liable for all other ad valorem taxes due on production under the lease;
(ii) In the case of severance taxes, any person extracting crude oil, lease condensate or natural gas and any person owning an interest in the crude oil, lease condensate or natural gas production to the extent of their interest ownership are liable for the payment of the severance taxes together with any penalties and interest;
(iii) Any taxpayer paying severance taxes on any crude oil, lease condensate or natural gas production may deduct the taxes paid from any amounts due or to become due to the interest owners of such production in proportion to the interest ownership.
Wyo. Stat. Ann. § 39-14-203(c).
117. The Department has issued Rules pertaining to reporting and remittance of tax:
Section 6. Persons Responsible for Remittance of Tax: Take in Kind Election, Term, Termination and Exchange of Information.
(a) This section identifies the persons responsible for remitting payment of ad valorem and severance taxes on mineral production in this state. For solid mineral production the mine operator shall report and remit tax payments on 100% of the production from the producing property.
(i) All Ad Valorem taxes on gross product from an oil and gas property attributable to any working or non-working interest owner shall be remitted by the interest owner or may be remitted on behalf of the interest owner in proportion to his ownership interest by the operator.
(ii) All severance taxes on gross product from an oil and gas property attributable to any working or non-working interest owner shall be remitted by the interest owner or may be remitted on behalf of the interest owner in proportion to his ownership interest by the operator.
(iii) All taxes on the gross product attributable to any interest owner electing to take in kind shall be remitted by the interest owner on behalf of the interest owner in proportion to his ownership interest by the operator. An election for operator reporting and remittance of ad valorem and severance tax shall be allowed if, on or before January 1st of the production year in which operator reporting shall commence, the take in kind owner notifies the operator and the Mineral Division in writing of the intent to have the operator report and remit on behalf of the take in kind interest owner. The operator or other entity reporting and remitting the interest owner’s gross product (ad valorem) tax must also report and remit severance tax.
(iv) An election made under this section shall remain in effect until terminated by the interest owner or by the Department pursuant to paragraph (v) of this subsection.
(v) An operator may petition the Department to terminate the interest owner election on the basis of either failure to provide the necessary information for reporting taxable volume and value, or failure to remit to the operator on or before the date the taxes are due, or as extended by written agreement between the parties, the amount of taxes owed by the take in kind owner. Notice and opportunity for a hearing shall be provided to the operator and interest owner, with a final decision by the Department within ninety (90) days following receipt of the petition.
Rules, Department of Revenue, Chapter 6, § 6(a).
118. The Department defines “take in kind” as follows:
Section 4b. Definitions - Oil and Gas
* * *
(s) “Take in kind” means the event when an election is made by an interest owner under a lease or joint operating agreement, with notice to the affected parties, to separately market or dispose of crude oil, natural gas or natural gas products. An interest owner must affirmatively exercise an option under a lease or operating agreement to separately market his share of the production to qualify as a take in kind. If an option to separately market is not exercised by the interest owner, the operator shall report the interest owner’s portion of that production. The phrase “take in kind” does not include sales under common agreement by interest owners and the operator where the purchaser merely makes disbursements for the purchases directly to the parties selling their production.
Rules, Department of Revenue, Chapter 6, § 4b(s) [emphasis supplied].
119. The Wyoming Supreme Court has recently addressed the interpretation of Wyo. Stat. Ann. § 39-14-203(c)(ii) and its related rules:
In a somewhat confusing analysis, DOR [the Department of Revenue] seems to suggest that because the severance tax is imposed on the privilege of extracting the mineral, somehow that fact requires the conclusion that only the operating owner “severs” the mineral and therefore, is the producer. However, both the statutes, and the DOR rules implementing them, provide that the owner of the mineral, not the operator, is responsible for paying the severance taxes. Section 39-14-203(c)(ii) provides:
In the case of severance taxes, any person extracting crude oil, . . . and any person owing an interest in crude oil, . . . production to the extent of their interest ownership are liable for the payment of severance taxes . . ..
The phrase “to the extent of interest ownership” modifies “any person extracting” and “any person owning” and, read properly, the statute clearly provides that each owner is responsible for taxes to the extent of their ownership. . . That concept is repeated in the DOR rules, in the section entitled, “Persons Responsible for Remittance of Tax: Take in Kind Election, Term, Termination and Exchange of Information,” which provides, “[a]ll severance taxes on gross product from an oil and gas property attributable to any working or non-working interest owners shall be remitted by the interest owner or may be remitted on behalf of the interest owner in proportion to his ownership interest by the operator.” Dept. of Rev. Rules, Ch. 6, § 6(a)(ii). With regard to take-in-kind working interest owners, the rules provide the take-in-kind owner must pay the tax or specifically elect the option of having the operator pay on its behalf. Dept. of Rev. Rules, Ch. 6, § 6(a)(iii).
Lance Oil & Gas Company v. Wyoming Department of Revenue, 2004 WY 156, ¶ 26, 101 P.3d 899, 906-907 (2004).
120. The Wyoming Supreme Court had previously described the statutory structure for collection and for ultimate liability of mineral taxes as follows:
In practical operation, we perceive that a simple taxation reporting and collection plan was enunciated by the legislature and applied by the Wyoming Department of Revenue and Taxation for taxation of the product produced in the unitized field. First, the unit operator is responsible for the reporting of the production and payment of the taxes on the entire well production, W.S. 39-6-304(a) and 39-6-307(e). Additionally, the tax is a lien on the interest owner (of any part of the produced mineral) until the tax is paid. W.S. 39-6-304(k); 39-6-307(e). The taxpayer paying the tax may deduct the tax from any amounts due or to become due to the interest owner, W.S. 39-6-304(h), or enforce other rights for reimbursement that may be provided in the contractual unit agreement documents. Consequently, we distinguish between the initial obligation to report and pay and the ultimate liability of the amount by approving the conclusion and decision of the district court. . .
BHP Petroleum Company, Inc., v. State, 784 P.2d 621, 627 (Wyo. 1989).
121. The Board may adjudicate a dispute between a taxpayer and the Department only by “approving the determination of the Department, or by disapproving the determination and remanding the matter to the Department.” Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668, 674 (Wyo. 2000).
CONCLUSIONS OF LAW - APPLICATION OF PRINCIPLES
122. From the Board’s perspective, the case is about the statutory constraints on the Department’s power to replace a valuation method already in use. The Legislature has specifically spoken to this subject. For a producer like ExxonMobil which does not sell its natural gas prior to the statutory point of valuation, the Department must identify the method it intends to apply to determine fair market value, and “notify the taxpayer of that method on or before September 1 of the year preceding the year for which the method shall be employed.” Wyo. Stat. Ann. § 39-14-203(b)(vi).
123. In contrast, the Legislature did not specifically speak to the constraints which apply to termination of a mutually agreed alternative method. The statute is silent on the subject. Wyo. Stat. Ann. § 39-14-203(b)(vii).
124. If one begins from the starting point of the constraints on the Department’s power to replace a method already in use, the case is factually trivial. When the Department sent its letter on May 21, 2004, directing ExxonMobil to report production year 2003 using the proportionate profits method, production year 2003 was already completed. To be timely, the Department would have been obliged to send a notice for production year 2003 on or before September 1, 2002. September 1, 2002, is over twenty months prior to the Department’s letter of May 21, 2004. The Department did not meet this deadline.
125. When the Department sent its letter on July 22, 2004, directing ExxonMobil to report production year 2004 using the proportionate profits method, production year 2004 was nearly seven months complete. To be timely, the Department would have been obliged to send a notice for production year 2004 on or before September 1, 2003. The Department did not meet this deadline.
126. When the Department sent its letter on July 22, 2004, directing ExxonMobil to report production year 2005 using the proportionate profits method, production year 2005 was still more than five months in the future. To be timely, the Department was obliged to send a notice for production year 2005 on or before September 1, 2004. The Department met this deadline.
127. Under the plain language of the statute, the Department provided timely notice to ExxonMobil only for production year 2005. Wyo. Stat. Ann. § 39-14-203(b)(vi); Conclusions, ¶ 110.
128. The Department’s inability to replace the settlement agreement method in the absence of timely notice did not leave ExxonMobil in limbo with respect to its reporting responsibilities. As of May 21, 2004, all of production year 2003 had already been reported using the settlement agreement method. As of July 22, 2004, a portion of production year 2004 had already been reported using the settlement agreement method, and it was reasonable for ExxonMobil to continue to report the balance of production year 2004 using the settlement agreement method.
129. Since there is no dispute about the Department’s right to terminate the 1989 Tax Settlement Agreement, its reasons for doing so are immaterial with respect to the timely notice issue.
130. We conclude that ExxonMobil met its burden of going forward with a preponderance of the evidence on the issue of timely notice of the Department’s selection of method. The burden accordingly shifted to the Department to defend its action. Conclusions, ¶ 109.
131. The Department’s argument on the timely notice issue appeared in a brief filed in advance of the Tier 2 hearing. [Department of Revenue’s Trial Brief (August 31, 2005); see Department of Revenue’s Hearing Brief (October 14, 2005), p. 2]. The Department characterized the issue as one of statutory limitations on the Department’s power to terminate the 1989 Tax Settlement (a power readily conceded by ExxonMobil, Findings, ¶ 16), and argued that this power must be unfettered. As we have seen, the 1989 Tax Settlement Agreement does not provide any express limitations on either party’s power to terminate. Findings, ¶ 15. Nor are there any express limitations in the statute. Since the limitations that concern the Department are not express, the Department asks that we find them to follow logically from other language of the statute:
Wyo. Stat. § 39-14-203(b)(vii) cannot be interpreted to limit the Department’s ability to terminate a mutually agreed upon valuation methodology. The statute, by its very language, absolutely requires in every case that the following conditions exist: 1) that the Department and taxpayer agree that one of the enumerated methods in (b)(vi) does not produce a representative fair market value; and 2) that an alternative valuation method is agreeable. Upon the Department’s rejection of the [1989 Settlement Agreement] for ExxonMobil’s 2003 LaBarge production, neither of these conditions was met and the mutually agreed upon [1989 Settlement Agreement] was no longer in effect. Upon rejection, the Department was required to employ a different method of valuation and could not be required to continue application of an agreement to which it no longer agreed or an agreement which did not return fair market value as required by law.
[Department of Revenue’s Trial Brief, p. 10]. We will consider this argument in detail.
132. The Department uses the verbs “terminate” and “continue” in a way that is not obvious, particularly if one focuses on production year 2003. By the date of the May 21, 2004, letter, production year 2003 had been finished for nearly five months, and the taxpayer’s final reporting for production year 2003 was complete. Conclusions, ¶ 103, 104. The Department plainly means both (1) it can “terminate” the application of the 1989 Tax Settlement Agreement to a year which has already passed, and (2) it cannot be required “to continue” the application of the 1989 Tax Settlement Agreement to a year which has already passed. As the Department phrases it, “the Legislature expressed its intent that the Department’s fundamental valuation authority and role continue for years after the mineral is actually produced and after taxpayers report taxable value.” [Department of Revenue’s Trial Brief, p. 10].
133. The Department correctly refers to its continuing role. Audits, and appeals from audits, may take many years to accomplish. Conclusions, ¶ 102. Yet the statutes providing for this continuing role do not expressly support the existence of a power to replace a valuation method already in use.
134. Our first step in evaluating the Department’s argument is to consider the language of the 1989 Tax Settlement Agreement, which the Department concedes to be binding. Findings, ¶ 19. The third and fifth sentences of Section 2.e, “Valuation of Future Production for all Purposes,” include words of interest:
If the Wyoming legislature passes legislation that requires Exxon to use valuation methods other than the comparison value method described above, or if the Legislature in the future imposes a specific tax on helium, the Parties agree that the questions of future taxability, for both severance and ad valorem purposes on production on and after January 1, 1989, and value of future helium production remain open and the parties are not prejudiced nor are the issues resolved in any manner by this Agreement.
* * *
If the State uses any method other than the comparison value based on the Howell and Yates agreements, the Parties agree that the question of the future taxability, for severance and ad valorem purposes, and value of future helium production remain open and are not resolved by this Agreement.
[Exhibit 804, pp. 100107-100108 (emphasis supplied); complete text at Findings, ¶ 15].
135. When we consider the plain language of the agreement to determine the parties’ intent, Conclusions, ¶¶ 112, 113, we infer that any termination of the agreement would act on future production, as distinguished from past or present production. Even though the 1989 Tax Settlement Agreement does not include a specific termination clause, the parties repeatedly used the word “future” when addressing the contingency of termination. Conclusions, ¶ 134. The language of the 1989 Tax Settlement Agreement therefore does not support the Department’s position. If termination were available only for future production from the perspective of the letters of May 21 and July 22, 2004, the Department could not terminate the effect of the agreement for the past production of 2003, or the then-present production of 2004. In contrast, the Department would be free to terminate the agreement for the then-future production of 2005. This result is consistent with our conclusions regarding the effect of the statutory notice requirements. Conclusions, ¶¶ 122-129.
136. Since the Department’s central argument is based on statute rather than the contract, we next consider the statute. The Department argues that it cannot use a mutually agreed upon method under Wyo. Stat. Ann. § 39-14-203(b)(vii) [“paragraph (b)(vii)”] unless one of the enumerated methods in Wyo. Stat. Ann. § 39-14-203 (b)(vi) [“paragraph (b)(vi)”] does not produce a representative fair market value. We first consider the sense in which the proportionate profits method produces a fair market value under paragraph (b)(vi).
137. ExxonMobil conceded the proportionate profits method could always have been applied to LaBarge production. [Tier 2 Transcript, Vol. I, p. 115]. This leaves only the question of whether the proportionate profits method produces a fair market value. Generally speaking, the Board has consistently decided that any (b)(vi) valuation method, properly applied, reaches fair market value. E. g., Union Pacific Resources Company et al, Docket No. 2000-147 et al., June 9, 2003, 2003 WL 21774603 (Wyo. St. Bd. Eq.)(hereafter Whitney Canyon 2000), ¶¶ 173-182. For natural gas, the statutory definition of fair market value states that fair market value “shall be determined as provided by . . . W. S. 39-14-203(b). . .” Conclusions, ¶ 92. For production such as Exxon Mobil’s LaBarge production, not sold at or prior to the statutory point of valuation, the statute states that the “department shall determine the fair market value by application of one (1) of the following methods,” and lists four methods including the proportionate profits method. Conclusions, ¶¶ 96, 97. The definition of the proportionate profits methods begins with the words, “The fair market value is. . ..” Conclusions, ¶ 97. Taking Pham’s concession together with the statute, we understand the Department to argue that the proportionate profits method could, at all pertinent times, have been used to reach a value which was, by definition, fair market value.
138. The
Department’s argument does not completely mesh with the plain language of paragraph
(b)(vii): “When the taxpayer and the department jointly agree, that the application of
one of the methods listed in paragraph (vi) of [Wyo. Stat. Ann. § 39-14-203(b)] does not
produce a representative fair market value for the . . . natural gas production, a
mutually acceptable alternative method may be applied.” (Emphasis supplied). The
Department does not give meaning to the word “representative,” which modifies “fair
market value” in paragraph (b)(vii). We note the adjective “representative” appears
in only one other place in Wyo. Stat. Ann. § 39-14-203(b), and with a consistent usage.
In paragraph (b)(vi), “representative” is part of the definition of the comparable
sales method, where the word modifies “arms-length market price.”
139. To interpret the word “representative” in paragraph (b)(vii), we simply give the word its ordinary and obvious meaning. Conclusions, ¶ 110. In this context, the correct definition of representative is, “being an example or type of a certain class or kind of thing; typical [a building representative of modern architecture].” Webster’s New World College Dictionary, 4th Edition (2001), p. 1217. While the proportionate profits method can be used to determine fair market value, paragraph (b)(vii) leaves open the possibility that the value so determined may not be an appropriately typical fair market value.
140. From
the record in this case, we know that there are various circumstances from 1989 through
2004 which would have caused the Department and ExxonMobil to doubt the result of the
proportionate profits method was representative or typical. At the most fundamental level,
we know the Administrator of the Mineral Tax Division until October 24, 2004, Randy
Bolles, had testified to a legislative committee that “the Department didn’t believe
the proportionate profits method was a valid method to use for the valuation of natural
gas.” [Tier 2 Transcript, Vol. II, p. 332]; see Findings, ¶ 33. This Board had
previously heard (and rejected) the same argument from the Department. Whitney Canyon
2000, ¶ 158. Since the Department went through a period during which it contended the
proportionate profits method was generally invalid, there was ample basis for the
Department and ExxonMobil to agree that the proportionate profits method did not produce a
representative fair market value for LaBarge production; and likewise a basis for the
Department to reach agreement with other producers who process natural gas.
141. We
have also found that the Department and ExxonMobil disagreed on numerous constituent
elements of the proportionate profits method. These included:
1. Whether the state could levy a severance tax on helium produced from federal lands, Findings, ¶ 17;
2. Whether the county could levy an ad valorem tax on helium produced from federal lands, Findings, ¶ 17;
3. Whether production taxes and royalties are included as direct costs of producing to determine taxable value using the proportionate profits method, Findings, ¶ 51, an issue subject to numerous appeals from this Board’s consistent rulings, Conclusions, ¶ 101;
4. Whether the point of valuation for LaBarge production is at custody transfer meters located near wellheads in the field, or at the outlet of the Black Canyon Dehydration Plant, Findings, ¶ 62.
142. These
are merely a few of the points in dispute regarding application of the proportionate
profits method to this taxpayer. Findings, ¶ 65; [see Prehearing Conference
Report, June 22, 2005, pp. 2-9]. When combined, these disputed elements generate a
wide range of taxable values, all under the rubric of the proportionate profits method. Findings,
¶ 66. In the words of the Department’s principal witness, “I think in [ExxonMobil’s]
opinion and ours as well that there were just so many issues involved with proportionate
profits calculation that they didn’t know and we didn’t know ultimately where that
value would end up.” [Tier 2 Transcript, Vol. III, p. 564].
143. We
find similar reason to doubt the suitability of Department’s own proportionate profits
calculations in the months before the May 21st letter. The Department was
forced to rely on 2002 cost data, known to be a year out of date. Findings, ¶¶
39, 40 . The cost data were prepared for the purpose of calculating MMS royalties, leaving
questions about their adequacy for the somewhat different purpose of proportionate profits
reporting. Findings, ¶ 67. The Department knew that any future audit of ExxonMobil’s
cost data would be a formidable task, Findings, ¶ 37, and would likely give rise
to changes in taxable value. Findings, ¶ 67.
144. In
such an environment, we see no practical impediment to an agreement between the Department
and a taxpayer that the results of the proportionate profits method were uncertain and
even indeterminate. Although the parties were firmly committed to their respective
positions by the time of the hearing in this matter, neither the Department nor ExxonMobil
could claim to predict the ultimate outcome of applying the proportionate profits method
to 2003 production. There were and are simply too many disputed issues. An agreement that
the proportionate profits method reached an uncertain or indeterminate value would satisfy
the requirement of paragraph (b)(vii) that the value reached using the proportionate
profits method was not representative. We accordingly conclude that the use of the 1989
Tax Settlement Agreement in the many years following the minimum term ending August 31,
1991, was consistent with the letter and intent of paragraph (b)(vii).
145. If the 1989 Tax Settlement Agreement could have properly been used in the years after August 31, 1991, the Department’s argument plainly proves too much. Following the Department’s logic, a mutually acceptable alternative method would never have been available to determine the value of natural gas process by the producer of that gas, even though valuation of producer processed gas has often presented difficult valuation problems. The Department has plainly entered into such settlement agreements. [Tier 2 Transcript, Vol. III, pp. 578-579]. In the specific instance of LaBarge production, the Department’s position also conflicts with the Board’s decision in ExxonMobil 2004, which sustained the Department’s use of the 1989 Tax Settlement Agreement as a mutually acceptable alternative method.
146. We
conclude that the purpose of Wyo. Stat. Ann. § 39-14-203 (b)(vii) is to broadly authorize
the Department and a taxpayer to compromise on a valuation methodology, even if a
statutory method is available for application under Wyo. Stat. Ann. § 39-14-203 (b)(vi).
Our reading is supported by public policy favoring settlements generally. Conclusions,
¶ 112.
147. Our
conclusion regarding the purpose of paragraph (b)(vii) is supported by Wyo. Stat. Ann. §
39-14-203 (b)(viii), which provides that a method selected under paragraph (b)(vi) must be
used “for three (3) years including the year in which it is first applied or until
changed by mutual agreement between the department and the taxpayer.” Since this
language authorizes a change to another method even after an available method has been in
use, paragraph (b)(viii) conflicts with the Department’s interpretation that a paragraph
(b)(vi) method must be unavailable before a paragraph (b)(vii) method can be used.
148. In
support of its main argument, the Department’s witnesses testified to two ancillary and
additional arguments that implicitly conflict with this Board’s previous rulings. These
conflicts with the Board’s prior rulings, and the findings and principles upon which
those rulings were based, are a supplementary and independent basis for rejecting the
Department’s position.
149. The
first of the Department’s ancillary arguments is that there is a lingering uncertainty
about the relationship of the 1989 Tax Settlement Agreement and the 1990 statutes. [Tier 2
Transcript, Vol. IV, pp. 766-768]. The Board previously addressed the relationship between
the 1989 Tax Settlement Agreement and the 1990 statutes at length. The key paragraph of
the Board’s decision bears repeating:
The Wyoming Supreme Court unequivocally held that Tax Settlement Agreement is of continuing force and effect. The Department is therefore bound first and foremost by the Tax Settlement Agreement, which took on the character of a judicial decree. Exxon Corporation, 987 P.2d 165. The subsequent 1990 statute governed the actions of the Department only to the extent that the requirements of the 1990 statute were not inconsistent with the requirements of the Tax Settlement Agreement.
ExxonMobil
2004, ¶ 265; Conclusions, ¶ 114. Starting from this point, the Board
concluded that the valuation method of the 1989 Tax Settlement Agreement was not identical
to the comparable value method defined in Wyo. Stat. Ann. § 39-14-203(b)(vi)(B),
and that the Department had not otherwise
determined that Tax Settlement Agreement method to be the same as, or an application of,
comparable value method defined in Wyo. Stat. Ann. § 39-14-203(b)(vi)(B). ExxonMobil
2004, Conclusions, ¶¶ 269-278.
150. When
the Board concluded the 1989 Tax Settlement Agreement was a paragraph (b)(vii) mutually
acceptable alternative method, it relied heavily on the facts presented in ExxonMobil
2004:
The possibility remains that the limitations imposed on the Department’s authority under the 1990 statutes conflict with the continued force and effect of the Tax Settlement Agreement. We conclude that there is no such inherent conflict. Since 1990, the Department has circulated notices of intended valuation method to the oil and gas industry, as required by Wyo. Stat. Ann. § 39-14-203(b)(vi). Findings, supra, ¶¶122, 140, 148. These notices have all contained an exception for mutually acceptable alternative methods of valuation. Findings, supra, ¶¶123, 140, 148. The Department relied on its authority to agree to a mutually acceptable alternative valuation method when accepting values determined for the LaBarge production after August 31, 1991. Findings, supra, ¶¶231-232.
ExxonMobil
2004, Conclusions, ¶ 278.
151. The
referenced Findings of Fact were the following:
122. On August 31, 1990, Marble sent a memorandum to all Wyoming oil and gas producers. [Exhibit 815, pp. 00076-00077; Tr. Vol. VII, p. 1353]. In this letter, Marble stated that the Department of Revenue and Taxation had elected the comparable value method of valuation for “instances where oil or gas production is not sold at or prior to the point of valuation pursuant to a bona fide arms-length sale or where the product is used without sale,” citing W. S. 1977 §39-2-208(d)(ii). [Exhibit 815, p. 00076]. Nothing about the letter specifically identifies any specific oil and gas property; and Exxon Mobil held producing properties other than LaBarge. [Exhibit 815, pp. 00076-00077; Exhibit 807].
123. The second page of the letter states that, “[t]he comparable value method must be used for 1991, 1992, and 1993 production unless an alternate method is mutually agreed to by the Department and the taxpayer....” [Exhibit 815, p. 00077]. We find that the Tax Settlement Agreement was an alternate method mutually agreed to by the Department and the taxpayer. In support of our finding, we note that a change in valuation method to the comparable value method at the beginning of 1991 would have been inconsistent with the plain terms of the Tax Settlement Agreement, which remained in force until at least August 31, 1991. [Tr. Vol. VII, p. 1375; Exhibit 804, ¶2.e.].
* * *
140. On August 26, 1993, Richard Marble again sent a memorandum to all Wyoming oil and gas producers regarding the valuation method for the upcoming three years. [Exhibit 815; Tr. Vol. VII, p. 1355]. This letter was identical in form and content to the memorandum of August 31, 1990, and distributed in the same manner. [Exhibit 815; Tr. Vol. VII, p. 1355]. Marble again communicated no intention to change the valuation method of the Tax Settlement Agreement.
* * *
148. On August 30, 1996, Schmidt issued a memorandum notifying all oil and gas producers that the Department would use the comparable value method to determine the value of natural gas not sold at the point of valuation. [Exhibit 815]. The memorandum stated that, “The comparable value method must be used for 1997, 1998, and 1999 production unless an alternative method is mutually agreed by the Department and the taxpayer.” [Exhibit 815, p. DOR-A 00157]. The Department “never thought of [the Tax Settlement Agreement] as being anything other than a negotiated settlement.” [Tr. Vol. IV, p. 840]. The Department did not expect parties with settlement agreements to respond to the notification of method. [Tr. Vol. IV, p. 838]. We find that this letter continued the pattern originally initiated by Marble, and contemplated that the Tax Settlement Agreement was a mutually agreed method of valuation.
* * *
231. The Department’s current position is that the Tax Settlement Agreement is a mutually agreed alternative method under the 1990 statute, presently codified as Wyo. Stat. Ann. §39-14-203(b)(vii). [Tr. Vol. III, p. 499, Vol. V, pp. 1101, 1105]. The Department explains that it has never analyzed the Howell and Yates Processing Agreements to see if they met the requirements of the comparable value method. [Tr. Vol. III, pp. 567-568, 595-596]. Exxon Mobil’s criticism of this position has been scathing, and the County’s only slightly less so. [Closing Briefs]. We view the Department’s posture as a natural outgrowth of conflicts between the Tax Settlement Method and the comparable value method subsequently enacted in 1990. These conflicts include, at a minimum, the taxability of helium and the treatment of the point of valuation. Generally speaking, these conflicts have long been understood by all parties to this proceeding.
232. We find that the Tax Settlement Agreement method is a mutually agreed alternative method, and is an alternative to the valuation methods codified in 1990. We accept the Department’s position as supported by the facts in the record. We do not fault the Department for declining, when confronted by the imminent prospect of the hearing in this matter, to resolve conceptual difficulties that have proven so resistant to resolution over the years.
ExxonMobil
2004, ¶¶ 122, 123, 140, 148, 231-231. Director Schmidt agrees with the manner in
which our decision in ExxonMobil 2004 was grounded in the pattern established by
Marble. [Tier 2 Transcript, Vol. IV, pp. 776-777]. That is, when the Department accepted
ExxonMobil’s reporting under the 1989 Tax Settlement Agreement in the years after 1991,
its acceptance evidenced the existence of a paragraph (b)(vii) mutually acceptable
alternative method as a response to the Department’s general demand for use of the
comparable value method.
152. The
pattern established by Marble remains the appropriate context in which to view the
Department’s response to ExxonMobil’s reporting under the 1989 Tax Settlement
Agreement. First, the Board views the Department’s triennial memoranda as applying to all
oil and gas taxpayers, including ExxonMobil and including ExxonMobil’s LaBarge
production. This view is consistent with the face of the Department’s triennial
directives, and is supported by Pham’s testimony that ExxonMobil received the general
memorandum. It is also consistent with the Board’s view that the general circulation of
the triennial memoranda forestalls potential state constitutional problems. Chevron
U.S.A., Inc., et al., Docket No. 2002-54, et al., January 25, 2005, 2005 WL 221595
(Wyo. St. Bd. Eq.), ¶¶ 350-378.
153. Second,
the Board’s view forestalls any confusion about the possible application of Wyo. Stat.
Ann. § 39-14-203(b)(ix). When the Department “fails to notify the taxpayer of the
method selected pursuant to” paragraph (b)(vi), the taxpayer has the right to select a
valuation method. From a comparison of the language concerning appeal rights found in
paragraphs (b)(viii) and (b)(ix), it further appears that the taxpayer may select a “valuation
technique” of its choosing when the Department fails to do so, and is not limited to the
methods stated in paragraph (b)(vi). No questions about the application of paragraph
(b)(ix) arise if the Department’s triennial memorandum applies to all oil and gas
taxpayers.
154. The
Department’s second ancillary point is that it could not fully evaluate the results for
production year 2003 until receipt of ExxonMobil’s annual reports on or about April 25,
2004. From this truism the Department infers a power, said to be restricted to paragraph
(b)(vii). The Department claims it may substitute an alternative valuation method when the
Department “doesn’t like the value” determined by the alternative method in place.
[Tier 2 Transcript, Vol. IV, p. 689].
155. In
contrast, the Department agrees that it is bound to respect a valid (b)(vi) method for
three years, without knowing in advance what value will be generated. [Tier 2 Transcript,
Vol. IV, pp. 680-681]. The Department relies on the absence of an agreement under
paragraph (b)(vi) to distinguish between paragraphs (b)(vi) and (b)(vii). [Tier 2
Transcript, Vol. IV, p. 712]. The Department also takes the position that the three year
statutory arrangement “was established so that if there were multiple or more than one
valid valuation methodologies that were applicable to a given production ... [the
Department] can’t go back and just decide retroactively, okay, of these three valid
methodologies let’s decide which one returns the highest value.” [Tier 2 Transcript,
Vol. IV, p. 712].
156. In its Trial Brief, the Department marshaled additional arguments to support its authority to change methods in reaction to the results of an alternative method:
. . . If the Department determines that a valuation methodology cannot be applied because of the facts or circumstances or because the method does not return a fair market value, the Department unquestionably has the authority to remedy the improper valuation of that mineral, including modifying the method of valuation. Any other legal conclusion greatly undermines the Department’s fundamental valuation responsibility. . .
. . . Exxon Mobil’s interpretation of the Department’s valuation authority requires the Department to accurately and finally evaluate taxable value before production even occurs. The legislature certainly did not intend to so limit the Department’s effectiveness . . .
[Department
of Revenue’s Trial Brief, pp. 21-22, 23].
157. The
Board has previously drawn a sharp distinction between appeals of the Department’s
selection of a method, and appeals of the Department’s application of a method. BP
Amoco Production Company et al., Docket No. 2003-100, May 25, 2005, 2005 WL 1276339
(Wyo. St. Bd. Eq.), ¶¶ 92-111. Generally speaking, the Legislature has obliged the
Department to select a valuation method no later than four months in advance of the first
of three production years, and obliged the taxpayer to appeal that selection no later than
four months in advance of the completion of the first of three production years. Id.
If this aspect of the tax statutes limits the effectiveness of the Department in some way,
as the Department now claims, that limit was intended by the Legislature. The Board agrees
with the Department that the apparent purpose of the Legislature was to prevent the
Department from exercising hindsight to select a valuation method which returns higher
value. Conclusions, ¶ 155. That is, of course, precisely what the Department has
done in this case.
158. The
Department offers two arguments to avoid the statutory distinction between selection and
application of valuation methods. The first is that there is an appropriate distinction
between a method selected under paragraph (b)(vi), and a mutually acceptable alternative
method under paragraph (b)(vii), based on the fact that the latter is an agreed method.
The Department has not persuaded us that this difference is a meaningful distinction with
regard to selection of method. The Legislature directly addressed selection of method in
paragraphs (b)(vi) through (b)(ix). Broadly speaking, there are three options: the
Department picks a method for three years under paragraphs (b)(vi) and (b)(viii); or the
taxpayer picks a method for three years under paragraph (b)(ix); or the Department and
taxpayer agree to an alternative method for an indeterminate period under (b)(vii). There
is every reason to read the four paragraphs in pari materia, as part of an overall
purpose. Conclusions, ¶ 110. We reject the Department’s request that we not do
so.
159. As
part of this overall structure, we conclude there is a legitimate distinction between
paragraph (b)(vi) and paragraph (b)(vii) with regard to the statutory requirement for
three years of use. The statute only requires a method to be used for three years when
fair market value “is determined pursuant to paragraph (b)(vi) of this subsection.” Wyo.
Stat. Ann. § 39-14-203(b)(viii). The same is true of paragraph (b)(ix). Wyo. Stat.
Ann. § 39-14-203(b)(ix). There is no similar constraint on use of a paragraph
(b)(vii) method. As a result, there was no statutory bar to prevent the Department from
terminating the 1989 Tax Settlement Agreement in time to value ExxonMobil’s 2005
production year by the proportionate profits method, as long as proper notice was given.
We reject ExxonMobil’s argument to the contrary. [ExxonMobil Corporation’s Closing
Brief on Tier 1 and Tier 2 Issues, pp. 12-13].
160. The
Department’s second argument is that it has broad authority to modify the valuation
derived from the 1989 Tax Settlement Agreement if, in the Department’s appraisal
judgment, that valuation does not return fair market value. [Tier 2 Transcript, Vol. IV,
p. 752]. The Board rejected a similar argument regarding the statutory basis for appraiser
discretion when advanced by oil and gas taxpayers in another case. Whitney Canyon 2000,
¶¶ 172-183. The Board finds no reason to reach a different conclusion when the
Department is the entity exercising judgment. The Department relies in part on the general
statement of administrative responsibility found in Wyo. Stat. Ann. § 39-14-202(a)(i):
“The department shall annually value and assess . . . natural gas at its fair market
value for taxation.” However, we have already observed that the statute includes far
more specific provisions for how this is to be done. Conclusions, ¶ 137. These
more specific provisions govern the general. Conclusions, ¶ 111.
161. We
note that the Department makes no effort to justify an exercise of its appraisal judgment
based on the language of the 1989 Tax Settlement Agreement. While the words “recognized
appraisal techniques” can be found in Section 2.e. the 1989 Tax Settlement Agreement, Findings,
¶ 15 (sentence four), they appear as part of a recital supporting the use of the
settlement agreement valuation method, not as a basis for voiding the results of a
valuation reached under the agreement.
162. As
noted above, the Board views this as a case in which the Department attempted to exercise
hindsight to select a valuation method which returns a higher value. By this ruling, we do
not express any opinion regarding the appropriate resolution of future cases in which the
facts may demonstrate that the taxpayer should never have used the selected method in the
first place. Compare Findings, ¶ 85.
163. In
sum, we conclude that the Department has failed to carry its burden to defend the action
of modifying the method of valuation used to determine the value of ExxonMobil’s LaBarge
production for production years 2003 and 2004. As a result, the Board does not reach any
issues concerning application of the proportionate profits method to production for
production years 2003 and 2004.
164. We
agree with Mr. Pham of ExxonMobil that the selection of method for production year 2005 is
not at issue, Findings, ¶ 87, but in any event have concluded that the Department
timely selected the proportionate profits method for that year. Conclusions, ¶¶
126, 127. The application of the proportionate profits method to production year 2005 is
not at issue in this case, and cannot be at issue until value for production year 2005 is
determined after ExxonMobil files its annual gross products report in 2006. As a result,
no issues concerning application of the proportionate profits method to determine taxable
value after production years 2003 and 2004 are before us. In addition, ExxonMobil has
appealed the Department’s value determination for production year 2004 in a separate
docket. Findings, ¶ 77.
165. The
effect of our decision is to leave the 1989 Tax Settlement Agreement in place, and with it
the reporting requirements described by stipulation of the parties. Findings, ¶
60. However, we agreed with the Department that the issue of the Department’s authority
to require ExxonMobil to collect and pay the taxes of the working interest
owner remains. Findings, ¶ 88. Since this issue is distinct from the notice issue,
the burdens are once again with ExxonMobil.
166. The
Department believes that there is a great deal at stake:
Exxon seeks to complicate the mineral tax scheme by convoluting its dual role as an interest owner and operator. Under Exxon’s theory, every person who owns an interest in the production would be required to separately file mineral tax returns on his proportionate share, even though the operator is in the best position to accurately report and remit the tax. . .
[Department of Revenue’s Hearing Brief, pp. 45-46].
167. We
disagree with this characterization of the issue. The Department assumes ExxonMobil would
have us conclude that every working interest owner is now the equivalent of a take-in-kind
interest owner. The issue before us is narrower: whether the Department can require
ExxonMobil, as operator, to collect and pay the taxes of working interest owners including
EOG and Yates, who are not take-in-kind interest owners. Where an operator in fact reports
and pays taxes for its working interest owners, the statute still authorizes the operator
to deduct those taxes from amounts due to those interest owners. Wyo. Stat. Ann. §
39-14-203(c)(iii).
168. Both
the Department’s principal witness [Tier 2 Transcript, Vol. III, p. 505] and its counsel
[Tier 2 Transcript, Vol. IV, pp. 847-851] rely on Wyo. Stat. Ann. § 39-14-203(c)(ii) as
the source of the Department’s power. It states: “In the case of severance taxes, any
person extracting . . . natural gas and any person owning an interest in the . . . natural
gas production to the extent of their interest ownership are liable for the payment of the
severance taxes together with any penalties and interest.” At the hearing in this
matter, the Department argued that this section provided that the operator (the person
extracting) could be held liable for payment of all severance taxes on gas produced
by the operator. [Tier 2 Transcript, Vol. IV, pp. 847-848].
169. The
Department’s reading is directly supported by cases decided under a prior codification
of the tax statutes, Wyo. Stat. Ann. § 39-6-307(e), repealed 1998 Wyo. Session Laws,
Chapter 5, § 4, p. 312, which distinguished reporting and payment functions from
liability. BHP Petroleum Co., Inc., v. State, 784 P.2d 621, 627 (Wyo. 1989) (“Consequently,
we distinguish between the initial obligation to report and pay and the ultimate
liability...”); Preferred Energy Properties v. Wyoming State Board of Equalization,
890 P.2d 1110, 1112 (Wyo. 1995); Petra Energy, Inc., v. Department of Revenue, 6
P.3d 1267, 1271 (Wyo. 2000). The Legislature recreated Wyo. Stat. Ann. § 39-6-307(e) with
slightly different language as part of the general recodification of Wyoming tax statutes
in 1998. 1998 Wyo. Session Laws, Chapter 5, § 1, p. 31. The pertinent
sentence of former Wyo. Stat. Ann. § 39-6-307(e) was: “Any person extracting valuable
products subject to this article, and any person owning an interest in the valuable
products to the extent of their interest ownership are liable for the payment of taxes
imposed by this article together with any penalties and interest.” We can identify this
language as very similar to paragraph (c)(ii), although it is not the same. The previously
decided cases continue to provide useful guidance. For example, the BHP Petroleum holding
that an operator is a “person extracting” applies to paragraph (c)(ii), just as it did
to Wyo. Stat. Ann. § 39-6-307(e).
170. The
Wyoming Supreme Court has recently interpreted paragraph (c)(ii). Lance Oil & Gas
Co. v. Wyoming Department of Revenue, 2004 WY 156, ¶26, 101 P.3d 899, 906-907 (Wyo.
2004). ExxonMobil argues that Lance holds the opposite of the Department’s
interpretation: “The phrase ‘to the extent of interest ownership’ modifies ‘any
person extracting’ and ‘any person owning’ and, read properly, the statute clearly
provides that each owner is responsible for taxes to the extent of their ownership.” Lance
Oil & Gas Co., 2004 WY 156, ¶26, 101 P.3d at 906-907 (Wyo. 2004). [Tier 2
Transcript, Vol. IV, pp. 866-867]. Stated somewhat differently, an operator is liable for
severance taxes to the extent of its ownership, and a working interest owner is liable for
severance taxes to the extent of its ownership. The statute fails to say anything at all
about the Department’s power to make the operator report and pay taxes for which it is
not liable. If one maintains the distinction made in BHP Petroleum between the
initial obligation to report and pay, and the ultimate liability, one can conclude that Lance
Oil & Gas does nothing to disturb the previous line of cases. BHP Petroleum,
784 P.2d 621; Preferred Energy Properties, 890 P.2d 1110; Petra Energy, Inc.,
6 P.3d 1267. ExxonMobil has not carried its burden of persuasion.
171. We
must nonetheless find against the Department because its Rules contradict the Department’s
position. A Department Rule speaks directly to payment of severance taxes by an operator,
and is therefore close to the subject matter of Wyo. Stat. Ann. § 39-14-203(c)(ii). The
Rule is mandatory for interest owners and permissive for operators: “All severance taxes
on gross product from an oil and gas property attributable to any working or non-working
interest owner shall be remitted by the interest
owner or may be remitted on behalf of the interest
owner in proportion to his ownership interest by the operator.” Rules, Department of
Revenue, Chapter 6, § 6(a)(ii) (emphasis supplied). As a separate basis for
its authority, the Department’s witness directed us to the definition of “take in
kind.” [Tier 2 Transcript, Vol. III, pp. 503-505]. The definition of “take in kind’
only imposes an obligation to report, not an obligation to pay: “If an option to
separately market is not exercised by the interest owner, the operator shall report the interest owner’s portion of that production.”
Rules, Department of Revenue, Chapter 6, § 4b(s) (emphasis supplied). We conclude
the Department’s Rules do not provide authority for the Department to require ExxonMobil
to collect and pay the taxes of its working interest owners, but instead require the
conclusion that the operator may collect and pay such taxes on a voluntary basis. The
agency’s position is inconsistent with the plain meaning of its rules. Conclusions,
¶ 115.
172. Despite
the shortcomings of its Rules for the purpose of requiring ExxonMobil to collect and pay
the severance and ad valorem taxes of EOG and Yates, the Department has demonstrated
compelling administrative reasons for generally being able to require an operator to
report and pay the taxes of working interest owners. Findings, ¶ 59. These reasons
echoed facts previously considered by the Wyoming Supreme Court:
. . . It is understandable why BHP disclaims interest in becoming its brother’s tax keeper under these circumstances. The countervailing posture of the State is that today, there are roughly a thousand operators and 15,000 producing wells in the state. If there were twenty to thirty working interest owners in the individual wells times the 15,000 wells, the State says, “we haven’t got a big enough building to hold the paper.” In practical fact, the argument of the State was obviously exaggerated but, without question, the singular increase from the 1,000 taxation entities would obviously occur and possibly in the range of tenfold or more.
BHP Petroleum, supra, 784 P.2d at 625, footnote 4. The Department’s administrative interests nonetheless cannot excuse adherence to its own Rules, which have the force and effect of law. Conclusions, ¶ 115.
173. By
our disposition of this issue, we avoid consideration of practical matters which may be
unique to LaBarge production. While ExxonMobil has revenue and cost information generally
sufficient to calculate EOG and Yates taxes, Findings, ¶ 79, the actual
calculation of EOG and Yates taxes presents unusual issues. Findings, ¶ 61, 62,
78, 79. By identifying this difficulty, we make no comment on how we would dispose of the
issue if presented in a different proceeding or with a different record.
ORDER
IT IS THEREFORE HEREBY ORDERED that the Department’s final decision to require ExxonMobil to report and pay its severance and ad valorem taxes for production years 2003 and 2004 is reversed and remanded; and
IT IS FURTHER HEREBY ORDERED The Department’s final decision to require ExxonMobil, as operator of the LaBarge fields, to collect and pay the severance and ad valorem taxes of its working interest owners for production years 2003 and 2004 is reversed and remanded.
Pursuant to Wyo. Stat. Ann. § 16-3-114 and Rule 12, Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected in fact by this decision may seek judicial review in the appropriate district court by filing a petition for review within 30 days of the date of this decision.
Dated this ______ day of December, 2005.
STATE BOARD OF EQUALIZATION
_____________________________________
Alan B. Minier, Chairman
_____________________________________
Thomas R. Satterfield, Vice-Chairman
_____________________________________
Thomas D. Roberts, Board Member
ATTEST:
________________________________
Wendy J. Soto, Executive Secretary